Oil Prices Spike as Hurricane Gustav Hits Category 1 and Heads for Oil Rigs in the Gulf of Mexico

Gustav is now a hurricane (Cat 1) with winds of 85 mph (hurricane hunters are finding winds in excess of 100 mph right now as they fly through the storm). The track is now showing this will be a major hurricane (Cat 3 at least) by the weekend moving into the Gulf of Mexico. Most models have Gustav over the Northwest Caribbean or the SW Gulf of Mexico by Saturday/Sunday. The steering factor here will be a ridge of high pressure and how strong it is to keep Gustav on a westward track.

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Later on this week, Gustav will be over extremely warm water and favorable conditions to strengthen, so rapid intensification is very possible. One of the models has this as a Cat 5 storm by the weekend. Certainly not out of the question.

Oil prices swung rapidly higher Tuesday as Hurricane Gustav threatened major oil operations in the Gulf of Mexico.

After falling close to $112 per barrel in overnight trading, light, sweet crude for October delivery spiked $2.33 to $117.44 a barrel on the New York Mercantile Exchange, a $5 swing.

Already adding support to oil prices was Russia's recognition of independence for two breakaway provinces in Georgia, which is likely to enflame tensions with the west.

In London, October Brent crude rose 1 cent to $114.51 a barrel on the ICE Futures exchange.

Oil prices switched directions several times during Tuesday's session, with the dollar swings seen as mostly responsible for the fluctuations.

"The Dollar Index ... has shown that it can at time override the oil fundamentals ... and will probably dominate until Gustav defines a more definitive path," said Olivier Jakob of Petromatrix in Switzerland.

Oil prices typically rise when the dollar falls, as investors buy commodities as a hedge against inflation and weakness in the U.S. currency.

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Although the dollar was still stronger Tuesday than Monday, by the afternoon in Europe it gave back some of its gains from earlier in the session against the euro. The euro had fallen below $1.46, a six-month low, but later climbed back to $1.4635.

At the same time, the dollar also lost some ground within the session against the Japanese yen, to 109.55 yen compared with 109.78 earlier, but still up from 109.35 on Monday.

Tropical storm Gustav became a hurricane Tuesday as it approached Haiti's southern coast, and is also on track to hit Cuba.

Forecasters said the hurricane's maximum sustained winds were near 90 mph Tuesday morning, with higher gusts. They said it could become a Category 2 hurricane with winds of 96 mph or higher before hitting Haiti.

"It's hard to predict where Gustav will strike," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "But the market is reacting to it and edging up."

Haitians were told to prepare for evacuations as the storm formed Monday in the Caribbean. Haiti upgraded storm warnings to hurricane warnings along much of its coast as Gustav closed in from the south.

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Forecasters said storm preparations in Haiti should be rushed to completion and that floods and landslides were possible across its southern peninsula. The forecasts suggested Gustav's eye could pass near the capital of Port-au-Prince, home to nearly 3 million people.

Traders worried that the hurricane could head into the Gulf, where there are many oil drilling platforms. The storm was centered about 130 miles south-southeast of Port-au-Prince and was moving toward the northwest near 12 mph (19 kph).

Analysts and traders also feared that mounting tensions with the West over the breakaway Georgian territories of Abkhazia and South Ossetia may increase the risk of an interruption of oil and natural gas flows to Europe, greatly dependent on Russian energy supplies.

In other Nymex trading, heating oil futures rose 3.8 cents to $3.1894 a gallon, while gasoline prices gained 3.86 cents to $2.9209 a gallon. Natural gas futures increased 39.2 cents to $8.217 per 1,000 cubic feet.