Oil rises as hurricane threatens Gulf

Worries about strengthening storm modestly offset a stronger dollar and weaker European demand.

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By Kenneth Musante, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Oil prices pushed higher Tuesday as Hurricane Gustav threatened the oil infrastructure in the Gulf of Mexico, but gains were tempered by a stronger U.S. dollar.

Crude for October delivery traded up $1.16 to settle at $116.27 on the New York Mercantile Exchange.

Prices whipsawed in a $5-a-barrel range, tumbling nearly $3 earlier in the session before stepping higher.

Hurricane Gustav, a Category 1 hurricane with winds up to 85 miles per hour, was on track to hit Cuba and parts of Haiti over the next few days, according to the National Hurricane Center. It could enter the Gulf on Sunday.

Offshore facilities in the Gulf of Mexico produce just over a quarter of all United States oil and are vulnerable to extreme storms.

Hurricanes Katrina and Rita in 2005, both of which reached Category 5 before making landfall, destroyed 113 offshore oil and natural gas platforms and damaged 457 pipelines, according to the government.

Gustav is still too far off to tell what kind of impact it will have on the U.S. or Mexico, according to Dennis Feltgen, meteorologist with the National Weather Service, but wind speeds could reach up to 130 miles per hour by Sunday.

"A lot could change between now and then, but it could be a [Category 3] just in time for the Labor Day weekend," said Feltgen.

Gustav is the 7th major storm to approach the region during this season. None have so far caused any significant damage to oil production.

Dollar: The dollar rose to a six-month high against the euro after research firm GfK reduced its forecast for German consumer sentiment in August. A second report measuring business confidence in Germany also showed August declines.

Furthermore, U.S. reports on consumer confidence and new home sales were better than expected, lending additional support to the dollar.

The Conference Board's consumer confidence index showed itslargest monthly gain in two years during August, while the Commerce Department said new home sales grew by 2.4% in July.

Oil is traded in dollars, so if the dollar becomes more valuable, oil becomes more expensive for foreign investors.

The market tried to go lower, but "it just can't do it because of the continuing weather situation," said Phil Flynn, senior market analyst with Alaron Trading in Chicago.

"Now we're basically on storm watch," he said.

Exaggerated volatility: The approach of Labor Day weekend added to oil's price swings Tuesday.

"It's a short week, there aren't many traders in, so volatility gets exaggerated," said Tom Orr, head of research for Weeden & Co.

The $5 swing in crude prices from earlier Tuesday could be simply a "knee-jerk" reaction, according to Orr.

"It could fizzle out fast if the storm fails to hit the [Gulf of Mexico]," he added.

Europe demand: Declines in European economies also strengthened ongoing concern that demand for crude products could wane as businesses cut back on operations and consumers reign in their spending.

Worries about falling demand have brought oil prices down nearly $34 a barrel since hitting a record high of $147.27 in July.

Investors have been concerned about falling demand in the U.S. as gasoline prices remain above $3 a gallon on average. However they have been turning their attention overseas in recent weeks on signs that the economic problems that had plagued the U.S. were spreading elsewhere.

"Declining demand as a result of prices has been noted in quite a few places," said Damian Kennaby, principal at Purvin & Gertz in London.

Eastern Europe: Concern about supply disruption in Eastern Europe also eased Tuesday as a BP-led consortium started delivering crude oil into a newly restarted pipeline through Georgia.

The pipeline, which can shuttle up to 1 million barrels of crude a day between Turkey and the Caspian Sea, had been shut down for several weeks due to a fire earlier this month.

Tensions in the region also remain high after the Russian government formally recognized the independence of two breakaway regions from the country of Georgia, which had been developing closer ties with NATO. To top of page

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