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Oil gains on inventories, storms

Flood warning issued for refinery-laden Texas coast as tropical storm nears; crude supplies drop far more than expected.

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Oil prices rose Wednesday as a tropical storm swirled in the Gulf of Mexico and the government reported that supplies of crude oil had fallen far more than expected.

U.S. light crude for September delivery rose 82 cents to settle at $73.20 per barrel on the New York Mercantile Exchange.

Traders nervously eyed Tropical Storm Erin, which the National Weather Service just upgraded to a named storm late Wednesday morning. The storm is currently 250 miles east of Brownsville, Texas.

Erin, with sustained winds of over 40 mph, is expected make landfall along the Texas coast sometime in the next 24 hours, the agency said.

It issued flood warnings for Friday along the Texas Gulf Coast, home to about a third of the nation's refiners.

Shell said it has begun evacuating some employees from one operation in the Gulf, but so far other oil companies are merely monitoring the situation, Reuters reported.

Tropical storm Dean also factored into the price rise.

Although still in the middle of the Atlantic, the weather service said it could strengthen to a hurricane by Thursday. Other forecasts said it could head into the Gulf of Mexico.

"It highlights market players' sensitivity to Katrina," said Mike Fitzpatrick from the trading desk at MF Global in New York. "They realize it only takes one."

On the inventory front, the Energy Information Administration said crude stocks dropped by 5.2 million barrels last week. Analysts were looking for a decline of 2.3 million barrels, according to Reuters.

Distillates, used to make heating oil and diesel fuel, rose by 200,000 barrels while gasoline supplies fell by 1.1 barrels. Analysts were looking for a 1.2 million barrel gain in distillate supplies and a 900,000 barrel decrease in gasoline stockpiles.

The report said refineries operated at 91.8 percent capacity, up slightly from last week and about as much as expected.

Gasoline demand was sluggish, growing at just 0.4 percent from the same time last year, EIA said. Gasoline demand usually grows at a rate of about 1.5 percent.

Oil prices hit a record trading high of $78.77 on Aug. 1, but have fallen in the wake of defaults in the subprime mortgage sector.

Some fear the subprime mess could spread to the broader economy, hurting economic growth and reducing demand for crude.

Oil prices have also fallen as investment funds, stung by losses in subprime mortgages and declining stock prices overall, sell commodities to raise cash. Top of page