Weaker Oil Demand eases Hurricane Concern

Oil prices also found support from heightened geopolitical tensions after Russia formally recognized the independence of two breakaway Georgian regions.

And natural-gas futures soared as much as 6% on Gulf production concerns.

Crude oil for October delivery climbed as high as $117.50 per barrel on the New York Mercantile Exchange Tuesday, but has since pulled back to $115, down 11 cents.

It was up 65 cents at $115.76 in electronic trading on Globex.

September natural gas rallied 43.5 cents, or 5.6%, to $8.26 per million British thermal units on Nymex, after trading as high as $8.30.

Gustav's "track keeps changing," said Phil Flynn, a vice president at Alaron Trading.

And in the meantime, the U.S. Energy Information Administration cut oil demand for June, he said in emailed comments.

So "unless these storms do some damage, it looks like oil is headed a lot lower due to shrinking demand," he said.

Gustav officially became a hurricane overnight, its winds picking up speed south of Haiti.

Currently a Category 1 hurricane, the storm may strengthen before its center moves over land Tuesday, the National Hurricane Center reported in an update at 11 a.m. EDT. It also said that the hurricane may see some weakening when it moves over Haiti and then re-strengthen as the center approaches eastern Cuba on Wednesday. 

"While it is far too early for definitive forecasts of its path, there is a possibility for it to pass over the western side of Cuba and into the Gulf of Mexico oil producing region next week," said James Williams, an economist at WTRG Economics. "Gustav will be the major driver of prices this week."

Gustav was packing sustained winds of about 90 miles an hour, the NHC reported. 

"The track, depending how it comes off Haiti, could have the storm move towards some sensitive production and refining areas," said Flynn.

But "for all the hand-wringing that this storm may cause, we should remember that the price sell-offs following storm systems that have failed have usually far outpaced the initial run higher," said Edward Meir, analyst at MF Global, in a research note.

Williams also said that "the strengthening dollar and more bad news for economic growth worldwide are putting downward pressure on prices."

Oil demand has been a key concern for the energy market.

A monthly report issued by the EIA on Tuesday said total crude oil and products supplied, which is a good indication of domestic consumption, was at around 19.553 million barrels per day in June of this year. That was down from 20.737 million barrels per day a year earlier.

For now, "this is anchoring the market," said Flynn.

 

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