Oil rises towards $120 as Gustav threatens US Gulf

The storm is forecast to regain hurricane status as it approaches the Gulf of Mexico, home to a quarter of U.S. crude oil production and 15 percent of its natural gas output.

U.S. crude oil for October delivery was up 76 cents at $118.91 a barrel by 1000 GMT. It earlier hit an intraday high of $119.25 a barrel.

London Brent crude was up 68 cents at $116.90 a barrel.

"Gustav...is on track to pose a sizeable threat to both upstream and downstream production capacity," Thomas Stenvoll, energy strategist at UBS said in a research note.

"The impact of Gustav on the downstream sector could be felt more acutely - at least in the short term as there is no U.S. government inventory that can be released."

The storm is forecast to hit the U.S. Gulf Coast around Monday and will be the first major hurricane to threaten U.S. energy installations since hurricanes Katrina and Rita in 2005.

Evacuation

AccuWeather said Gustav could strengthen into a Category 4 or 5 storm over the Gulf.

Shell Oil Co, the U.S. Gulf of Mexico's largest producer, said output would be affected as early as Thursday as it evacuated all workers from offshore operations.

"It looks as though the hurricane is on track to inflicting damage," said Ken Hasegawa, an analyst at broker Newedge in Tokyo. "It would be very difficult to be in a short position today and tomorrow."

He predicted prices could surpass last week's high of $122.04 by the end of day.

"(There is the U.S.) Labour Day holiday on Monday, and the market will be shut. There's a lot of nervousness," said Peter McGuire, managing director of Commodity Warrants Australia.

He said oil could hit around $130 over the next week and a half on hurricane worries.

Oil has fallen more than $30 a barrel from its record peak of $147.27 reached on July 11. But the threat of Gustav has helped prices to regain some lost ground.

The market surged to record highs this year in response to a string of bullish factors, including a weak U.S. dollar, expectations of a tighter supply/demand balance long term and political tensions over Iran.

The dollar has been strengthening, but slipped from a six-month high against the euro on Thursday after comments by European Central Bank officials the previous day dampened speculation about a cut in euro zone interest rates.