Oil fluctuates as Gustav bears down on Gulf

Oil prices shot above $120 a barrel and then pulled back Thursday as traders bet the government would tap the Strategic Petroleum Reserve if Tropical Storm Gustav disrupts production. Regardless, consumers are still likely to see a hike in pump prices for Labor Day weekend.

Gustav, approaching Jamaica with winds near 70 mph, could regain hurricane strength later Thursday and possibly enter the Gulf of Mexico _ home of a quarter of U.S. crude production _ as a dangerous Category 3 storm early next week.

Fearful of a direct hit, oil companies raced to remove workers from vulnerable oil and gas platforms and brace the structures for heavy rain and wind.

Light, sweet crude for October delivery jumped as high as $120.50 a barrel on the New York Mercantile Exchange before pulling back to $115.75, down $2.50. Light trading heading into holiday weekend exacerbated the volatile trading.

Oil was also being pressured by a government report showing that U.S. natural gas supplies jumped much more than expected last week because of weak demand, sending prices for the fuel plummeting.

Natural gas for October delivery fell 74.6 cents, or 8.68 percent, to $7.862 per 1,000 cubic feet.

Atmospheric models showed Gustav heading toward Louisiana and areas devastated by Hurricanes Katrina three years ago Friday, though it was too early to pinpoint where it would strike.

The storm not only threatens the more than 4,000 oil and gas rigs scattered throughout the Gulf, but also the dozens of oil refineries dotting the vulnerable coastline from Texas to Louisiana.

Regardless of where Gustav hits, analysts said U.S. pump prices are still going to rise at least some, probably in time for Labor Day weekend.

Fears of disruption in energy production have already sent wholesale gas prices soaring by up to 40 percent in recent days, meaning filling stations will have little choice but to pass on those costs to consumers.

"Prices are going to go up pretty soon. You're going to see increases by 5, 10, 15 cents a gallon," said Tom Kloza, publisher and chief analyst at the Oil Price Information Service in Wall, N.J.. "If we have a Katrina-type event, you're talking about gas prices going up another 30 percent."

That would send retail prices back above $4 a gallon, a level first reached in July.

Oil's retreat in the face of a possibly dangerous storm surprised some oil market watchers, who attributed the move to speculation that the government could release supplies from the Strategic Petroleum Reserve to counter any drop in production from Gustav. The International Energy Agency said the 27-member body was prepared to tap its emergency stocks if needed.

"I think that's taking some of the steam out of this rally," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

Meanwhile, the exodus from the Gulf by oil workers accelerated.

Royal Dutch Shell PLC has evacuated nearly 400 people and said it will bring in another 270 Thursday.

The company said production will be impacted. BP PLC was also removing personnel from the region that's home to about a quarter of U.S. crude production and much of its natural gas, while ExxonMobil said it was bracing its structures for heavy wind and rain.

Transocean, the world's biggest offshore drilling contractor, is suspending operations at all of its rigs and pulling nearly 1,600 people out of the Gulf.

Weather research firm Planalytics predicted as much as 80 percent of the Gulf's oil and gas production could be shut down as a precaution if Gustav enters the region as a major storm.

Gustav formed Monday and roared ashore Haiti Tuesday as a Category 1 hurricane. The storm triggered flooding and landslides that killed 23 people in the Caribbean. It weakened into a tropical storm, though it is likely to grow stronger in the coming days by drawing energy from warm open water.

Forecasters said Gustav might slip between Mexico's Yucatan Peninsula and the western tip of Cuba on Sunday, then march toward a Tuesday collision with the U.S. Gulf Coast _ anywhere from south Texas to the Florida panhandle.

"We know it's going to head into the Gulf. After that, we're not sure," said meteorologist Rebecca Waddington at the National Hurricane Center. "For that reason, everyone in the Gulf needs to be monitoring the storm."

Gustav is the first storm of the 2008 Atlantic hurricane season to pose a serious threat to offshore oil and gas installations in the Gulf. In 2005, Katrina and Rita destroyed 109 oil platforms and five drilling rigs.

In other Nymex trading, heating oil futures fell 7.28 cents to $3.1889 a gallon, while gasoline futures dropped 8.22 cents to $2.985 a gallon.

In London, October Brent crude fell $2.22 to $114 a barrel.