Oil above $120 on hurricane fears

Oil prices rocketed above $120 on Thursday as Tropical Storm Gustav approached the Gulf of Mexico - before falling back in a see-saw session.

Having battered Haiti there are fears Gustav may disrupt oil production.

But analysts said a belief that the US government would tap the Strategic Petroleum Reserve if this happened, caused prices to fall back.

US light sweet crude ended $2.56 lower at $115.59 a barrel. London Brent crude lost $2.05 to settle at $114.17.

The US has only twice tapped its emergency reserve to respond to disruptions or supply shortage concerns. The most recent saw about 700 million barrels released after Hurricane Katrina.

And the International Energy Agency said it was prepared to tap its emergency stocks if needed.

This prospect was "taking some of the steam out of this (price)rally," said Jim Ritterbusch, of energy consultancy Ritterbusch and Associates.

The storm is on course to hit the US coast by Monday, and there are fears it may be strengthening into a hurricane.

Inflicting damage

With 85% of US offshore oil and gas production at risk of being affected, analysts predict that oil prices will rise further until Gustav has run its course.

"Oil markets are waiting for Gustav"
PetroMatrix analyst Olivier Jakob

UK oil giant Shell has already removed about 400 staff from its offshore facilities in the Gulf of Mexico with another 270 expected to be withdrawn.

"It looks as though the hurricane is on track to inflicting damage," said Ken Hasegawa, an analyst at broker Newedge in Tokyo.

Fellow oil analyst, Peter McGuire of Commodities Warrants Australia, predicted that the impact of Gustav could lead to oil prices returning above $130 a barrel, a price last seen in July.

"Oil markets are waiting for Gustav," said PetroMatrix analyst Olivier Jakob.

"It is still potentially going towards the oil assets of the US Gulf but current forecasts are not showing it to be the mother of all hurricanes."