| | |  Business News | August 2008 
Oil Up as Gustav Threatens Production in the Gulf of Mexico
 Kenneth Musante - CNNMoney.com
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Oil prices turned higher Friday as Tropical Storm Gustav threatened oil infrastructure in the Gulf of Mexico, and the economic effects of the government's stimulus package began to fade.
U.S. crude for October delivery rose $2.65 to $118.24 a barrel as investors braced for the worst over the Labor Day weekend.
Gustav was projected to enter the Gulf on Sunday, and some models show the storm could reach Category 4 strength before it reaches Cuba, according to the National Hurricane Center.
Facilities in the Gulf account for about 25% of U.S. oil production. Offshore platforms and pipelines buried in the sea bed are vulnerable to extreme storms such as hurricanes.
Just three years ago, hurricanes Katrina and Rita devastated oil facilities before battering the Louisiana coast. The storms, which reached Category 5 strength before making landfall, destroyed 113 offshore oil and natural gas platforms and damaged 457 pipelines in 2005.
Oil companies are shutting down production and oil traders are hedging their bets ahead of the weekend, according to Karen Matusic, spokeswoman for the American Petroleum Institute.
"Even if the storm doesn't hit, you're going to get companies evacuating the rigs for precautionary reasons," she said.
Storm preparations: Oil companies have tried to improve the storm resistance of offshore rigs and pipelines since Katrina and Rita.
Drilling rigs and production platforms moored to the sea floor in the Gulf had been attached with eight lines, and are now required to be moored with 12 to 16 lines. Pipelines are now required to be buried deeper beneath the sea floor.
"That's one reason the response to this storm has been somewhat muted so far," said Jim Ritterbusch, president of oil advisory firm Ritterbusch and Associates.
The new safety measures should make facilities much more resistant to storm damage, but Gustav would be their first real-world test.
"There's concern for the offshore platforms," said Michael Lynch, president of Strategic Energy & Economic Research, Inc. But the biggest concern is "power loss at some facilities," he said.
If the storm disrupts electricity, the platforms may be unable to operate. However, facilities are generally better equipped to handle power outages now than they were in 2005, according to Lynch.
"The biggest risk is that you get the major loss of a natural gas processing facility," said Lynch. Fluctuations in natural gas prices can also affect crude oil, since both are used in similar applications such as home heating.
On Thursday, Gustav sent crude prices as high as $120.50, although prices later fell in part because of a report of a large increase in natural gas supplies.
End to stimulus: Oil rose higher after the Commerce Department reported a slight decline in personal income, signaling that the effects of the government's $90 billion stimulus program were drawing to an end.
The program, designed to jump-start the economy, boosted annual gross domestic product 3.3% in the second quarter.
The report had a mixed effect on oil prices, according to Juan Pablo Fuentes, economist with Moody's Economy.com.
While an end to the stimulus boost would signal a decline in crude demand, a weaker economy would also drive down the U.S. dollar. "Usually if you have a bad economic indicator, you would have a weaker dollar," said Fuentes.
Oil is traded in dollars, so a weaker dollar makes oil cheaper for foreign investors. Many also purchase commodities as a hedge against inflation.
The dollar fell against major currencies Friday, after rising the day before in response to the GDP report. |
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