Gustav puts a brake on falling oil prices

Aug 27 2008 by Alex Turner, Liverpool Daily Post

COMMODITY prices could be caught up in a storm as recent volatility continued yesterday.

Hurricane Gustav is threatening oil production in the Gulf of Mexico, and the potential disruption is starting to put upward pressure on oil and gas prices after recent falls.

Yesterday gas prices in Britain dived but oil rose. Low demand and healthy supply drove down gas prices to 49p per therm from Friday’s prompt price of 65p, which had been caused by a drop in flows into Scotland.

However a rebound in flows into Scotland over the weekend, as well as low demand for gas in the UK and in continental Europe, caused the 25% fall in price.

“Gas has come back and the Europeans don't seem to want any,” said one trader.

“It's low demand more than anything.”

The price of gas on the forward market for this winter fell yesterday by about 5p to 96.5p per therm and summer 2009 slipped to 81.5p, as oil prices fell below $114 a barrel.

Oil fell as the dollar hit a six-month high against the euro after weak German data highlighted a flagging euro zone economy.

Investors see oil, and other commodities, as less attractive as an inflation hedge when the dollar is strong.

However Hurricane Gustav, a category one hurricane which is strengthening in the central Caribbean, is threatening to disrupt oil and gas output off the coast of America which caused an afternoon rise to $117 a barrel.

“Short term trading on oil should now be dominated this week by tracking Gustav,” said Olivier Jakob, an oil analyst at Petromatrix in Switzerland.

Forecasters are predicting the hurricane will enter the Gulf of Mexico as a major storm by the weekend.

The Gulf is home to about 25% of American oil production and 15% of its natural gas output.

One of the largest oil and gas producers in the region, Royal Dutch Shell, has said it would begin evacuating nonessential personnel from offshore facilities later today.

The conflict in Georgia has so far had little influence on oil prices, despite some disruption to Azeri oil shipments through the country. Edward Meir, analyst at MF Global, said: “Energy markets have not yet focused on what this latest escalation could mean for a potential disruption in energy supplies.

“Until we get better clarity on this latter issue, we expect the price reverberations from this situation to be relatively contained.”

The former chief executive of BP, John Browne, yesterday predicted that oil prices would bottom out at $80-$100 a barrel.

“It is difficult to see oil prices much below $100, so $80-$100,” Mr Browne said at the ONS oil and gas conference in Norway. “As a flow, predicting the ceiling is difficult.”

Oil has fallen sharply from July’s record high of $147, on the back of falling demand, however it remains up 15% in 2008.

alex.turner