Oil: Price leaps past US$70 as storm hits

NEW YORK - Oil prices surged to a record above US$70 a barrel before paring gains on Monday as one of the biggest hurricanes in US history disrupted oil and gas production in the Gulf of Mexico.

US crude oil futures jumped nearly US$5 in electronic trade to touch a peak of US$70.80 per barrel, the highest front-month price since the New York Mercantile Exchange (NYMEX) began trading the contracts in 1983.

Oil settled up only US$1.07 at US$67.20 a barrel, trimming the early gains after Hurricane Katrina slammed into Louisiana and Mississippi and dealers awaited news of damage to oil installations and refineries.

Lasting damage to vital US oil and refining assets would further strain an industry that has struggled to keep up with two years of rapidly rising oil demand.

The US Coast Guard said it had received early reports of oil platforms adrift in the gulf. Shell Oil said Monday two of its drilling rigs under contract had drifted off location following the storm.

"Nobody knows the full extent of the damage," said Marshall Steeves, analyst at Refco Group. "The speculation is that it will be worse than Ivan but we won't really know for days, until oil companies get personnel out there and survey the damage."

Hurricane Ivan last September wiped out a total of around 45 million barrels of US oil output over six months.

On Monday afternoon, the US Minerals Management Service said that more than 90 per cent of the gulf's oil production and 83 per cent of its gas output was shut.

"The price floor for the market will be higher than it was before Katrina," said Frederic Lasserre of SG Commodities.

The Gulf of Mexico normally pumps about 1.5 million barrels per day (bpd) of US crude, a quarter of domestic output and equivalent to nearly 2 per cent of global oil production.

"The only way we can avoid yet higher prices is if President Bush releases supply from the Strategic Petroleum Reserve," said David Thurtell, strategist at Australia's Commonwealth Bank.

The administration said on Monday it was willing to consider loaning crude from its 700-million-barrel SPR if refiners requested oil.

The US Department of Energy loaned out 5.4 million barrels last year after Ivan.

Oil product prices also shot higher to records as the storm forced eight refineries in southeast Louisiana to shut, and two others to reduce operations. The refineries account for more than 9 per cent of total US refining capacity.

Petrol soared as high as US$2.1575 a gallon in the US and heating oil rocketed past US$2.00 a gallon for the first time. Natural gas prices were also up 20 per cent.

Dealers feared the storm will tighten fuel supplies, which are much lower than relatively robust crude stockpiles and more difficult to replace as most refiners have been pumping flat out to meet rising demand.

Three of the shut refineries appeared to be directly in the path of the eye of the storm.

The Louisiana Offshore Oil Port (LOOP) also shut down at the weekend, halting 1 million-bpd of crude imports, a tenth of the nation's total.

Opec's President Sheik Ahmad al-Fahd al-Sabah said that he would propose the group raise both real oil output and its output target by 500,000 bpd at its meeting in September in an attempt to lower prices.

He said most of the extra oil would come from Saudi Arabia, the only Opec member with sizable spare capacity.

But the Saudi spare capacity is mostly heavier crude that refiners find difficult and costly to process into transport fuels.

Opec had around one million bpd of spare capacity, Sheik Ahmad said. The group is already producing at its highest levels for nearly 26 years.

Any further rise in output would eat into what little is left of Opec's capacity cushion to deal with any unexpected global supply outages.

- REUTERS