Oil surges past $70 as Katrina hits Gulf

Oil prices hit new record highs after crossing $70 a barrel in Asian trading hours Monday as powerful Hurricane Katrina threatened the crude-producing Gulf of Mexico region in the United States.

With the psychological barrier now breached, some analysts said prices could now aim for the once unthinkable $80 a barrel—a level which economists fear could severely dent consumer demand and curb business activities.

New York’s main contract, light sweet crude for delivery in October, touched a high of $70,80 in Asia on Monday morning on news that Katrina was swirling dangerously close to the heart of US production and refining operations around New Orleans.

After the hurricane was downgraded a notch lower from a maximum category five storm, at 5pm (9am GMT) the benchmark futures contract was trading at $69,08 a barrel, up $2,95 from its close of $66,13 in the US market on Friday.

The price was more than double levels at the end of 2003.

Share markets across Asia and the Pacific tumbled, with dealers saying the cost of crude had struck a level widely seen as a break point—at which oil costs begin eroding economic growth, weakening currencies, fuelling inflation, and pressuring central banks into raising interest rates.

Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures in Tokyo, said the market will await the actual impact of the hurricane on production but he believed $70 oil may not be sustainable because the US summer holidays are now drawing to a close, reducing gasoline demand.

“Seventy dollars is completely far away from the fundamentals,” he said.

“It’s quite difficult to sustain.”

But Dariusz Kowalczyk, a Hong Kong-based investment strategist at CFC Seymour Securities, feared that the impact would be longer-lasting as damage to offshore oil rigs and onshore refineries would take time to repair.

Offshore production platforms have been evacuated and refineries onshore shut down ahead of Katrina, one of the most powerful Atlantic hurricanes on record.

The Louisiana port in New Orleans, which handles 11% of US crude imports, or one million barrels of oil a day, was on the path of the storm as were refineries in Alabama and Mississippi.

Kowalczyk compared Katrina to Hurricane Ivan which pummelled the US Gulf Coast in September last year, causing widespread damage to the region’s oil production infrastructure and leading to a 22% rise in prices.

While prices have stabilised after breaching $70 a barrel, “we are still in a very bullish market,” he said, adding it was possible prices could even hit $80 a barrel.

“I think it will be a more sustained move higher… There is room for significant volatility in the days ahead,” he said.

He pointed out that the February futures contract on the New York Mercantile Exchange has struck $71,87 a barrel—the highest level for any contract and an indication of where the prices could go.

Gasoline prices in particular have shot up three percent from Friday’s close—a worrying trend because of its direct impact on US consumers, he said.

He said reports from the United States showing consumer sentiment already sank in late August indicated that higher oil prices could have started to restrain all-important spending by US buyers.

The consumer sentiment index fell to 89,1 in late August from 96,5 in July and 92,7 in early August to its lowest level since May, a University of Michigan survey showed.

But a dip in US consumer sentiment could also be positive for the market because it would help bring down oil prices, which have been driven partly by soaring demand in the world’s biggest economy, he said.

Kowalczyk also said the standoff over Iran’s nuclear fuel work was another issue to watch, because any move towards sanctions could disrupt crude supplies from that oil-producing country.

“There is a lot of risk unrelated to global demand for oil such as supply reductions due to the hurricane and Iran situation,” he said.

Economists said the higher oil prices would restrain Asia’s growth momentum, but agreed the impact would be cushioned by other factors such as continued investment growth and strong export demand from the United States and China. - Sapa-AFP

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