Oil rises as tropical storm forms in Caribbean

August 25, 2008 6:20:50 PM PDT
Oil prices ended a choppy session slightly higher Monday, edging back above $115 a barrel after Tropical Storm Gustav formed in the Caribbean.

Light, sweet crude for October delivery rose 52 cents to settle at $115.11 a barrel on the New York Mercantile Exchange after earlier falling as low as $113.68. Trading was light heading into the Labor Day holiday now a week away, adding to the volatility that has characterized the market in recent days. Prices swung between $12 Thursday and Friday.

At the pump, a gallon of regular gasoline shed almost a penny overnight to a national average of $3.681, according to auto club AAA, the Oil Price Information Service and Wright Express. Gas prices have dropped 15 cents a gallon in the last two weeks, according to the Lundberg Survey of 7,000 gas stations nationwide.

Crude traded erratically most of the day in lockstep with a wavering U.S. dollar, which has become the focal point for investors trying to figure out whether crude is going higher or lower. The greenback gained ground against the euro earlier Monday, fell back, then gained again in a span of a few hours.

A stronger dollar typically makes oil less attractive to investors who buy commodities as a hedge against inflation and weakness in the U.S. currency. But prices were supported by fears that Gustav could threaten oil and natural gas production in the Gulf of Mexico.

"The dollar wants to pull oil lower and the storm wants to pull it higher. It's a bit of a tug-of-war right now," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.

Gustav, the seventh named storm of the Atlantic hurricane season, was heading for the Dominican Republic and Haiti with maximum sustained winds of near 60 mph, but it was too early to tell if it would enter the Gulf.

Oil's uncertainty Monday followed a round of hyper-volatile trading last week. On Friday, crude fell $6.59, or 5.4 percent, to $114.59 a barrel. It was crude's largest single-day price drop in percentage terms since Dec. 27, 2004. That decline wiped out gains from an almost $6 rally on Thursday.

Analysts said the market's inability to rally in the face of bullish news such as threats to energy supplies from a conflict between Russia and Georgia and another tropical storm suggests that crude remains in a downward trend; prices have dropped about $30, or 25 percent, from record trading levels above $147 a barrel reached last month.

"From the Caribbean to the Caspian, we've had one bullish headline after another and the market cannot generate a (sustained) rally," said Stephen Schork, an analyst and oil trader in Villanova, Pa. "It certainly doesn't bode well for anyone who owns commodities."

Still, unresolved tensions between the U.S. and Russia over the conflict in Georgia could rekindle supply worries and send prices higher.

Russia pulled the bulk of its troops and tanks out Friday under a cease-fire agreement, but built up its forces in and around South Ossetia and Abkhazia, both separatist regions.

A U.S. Navy destroyer loaded with humanitarian aid reached Georgia's Black Sea port of Batumi on Sunday, a development that a Russian general suggested would worsen tensions between the former Cold War foes.

A Monday vote by Russian lawmakers unanimously asking President Dmitry Medvedev to recognize the independence of Georgia's two rebel provinces added to the concerns of energy markets.

Despite the conflict, some analysts said energy flows from Russia to the West were safe.

"We continue to see little chance for oil to be used by Russia as a bargaining tool," said Olivier Jakob of Petromatrix in Switzerland. "Oil is the weapon of last resort, not of first resort ... and it would make no sense for Russia to limit exports of crude or products to European countries."

In other Nymex trading, heating oil futures rose 2.03 cents to settle at $3.1514 a gallon, while gasoline prices rose 1.37 cents to settle at $2.8823 a gallon. Natural gas futures fell 1.8 cents to settle at $7.825 per 1,000 cubic feet.

In London, October Brent crude rose 41 cents to $114.33 on the ICE Futures exchange.


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