Why Gulf storms make oil traders so jumpy

NEW YORK (CNNMoney.com) -- So a little storm swirled off the Texas coast Wednesday, and oil traders got all excited.

Crude prices rose nearly a dollar Wednesday as Tropical Storm Erin, the first named storm to hit the Gulf Coast in 2007, approached land.

Video More video KHOU's Alex Sanz reports from Surfside Beach, Texas, where Erin brought heavy rain and rough seas. Play video

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"It highlights market players' sensitivity to Katrina," Mike Fitzpatrick, an analyst at MF Global in New York, said Wednesday when describing the price increase.

But Erin was only a tropical storm, with wind speeds of only about 40 miles an hour.

Erin was then downgraded to a tropical depression Thursday, and oil prices promptly sank more than $2 to just under $71 a barrel, a drop of about 3.5 percent. The decline was due not just to the storm's downgrade but also to concerns that problems in the credit market will dent the broader economy, crimping demand for oil.

Still, the next storm, Hurricane Dean, is just entering the Caribbean and may threaten Gulf oil operations early next week.

What got everyone so jumpy Wednesday was that Erin was the first named storm that threatened the Gulf of Mexico in a year that is projected to see more storms than normal.

The National Weather Service is expecting 13 to 15 named storms this year (a named storm has wind speed over 39 miles per hour), with 7 to 9 of those becoming hurricanes - defined as storms with wind speeds 74 miles an hour or higher.

In a normal year, 11 named storms form in the Atlantic, with 6 of them becoming hurricanes.

More storms are predicted this year - and likely for the next several - because hurricane activity goes in cycles and we are in the middle of an active cycle, said Dennis Feltgen, a meteorologist at the National Hurricane Center in Miami.

The cycles last 20 to 30 years, said Feltgen. The most recent one began in 1995.

Oil traders are obviously hyper-sensitive to storms in the wake of hurricanes Rita and Katrina, which tore through the Gulf in 2005, and in addition to causing billion of dollars in damage and the loss of hundreds of lives, knocked out a big chunk of the nation's oil production and refining capacity.

The Gulf is home to about a third of the country's refineries, a quarter of its oil production and 15 percent of its natural gas production. It also contains the country's only deep-water port for oil imports.

Some of those facilities are still being repaired from 2005's storms, said John Sullivan, who covers Gulf of Mexico issues for Energy Intelligence Group, a publisher of industry newsletters. But Sullivan said much of the production and refining capacity that was knocked out in 2005 has been restored.

Moreover, he said, the industry has done things like secure drilling rigs with stronger moorings, implement better storm procedures and built higher levies around refineries in an attempt to avoid a repeat of 2005.

"The companies learned a lot, and they are putting those lessons into action," said Sullivan.

But he added, and this is really what makes oil traders so nervous, "There's only so much you can do to prepare for a storm like Rita or Katrina."