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Oil up $3 to $119 as storm Gustav threatens

LONDON - Oil rose for a third day on Wednesday, lifted by the possibility that Tropical Storm Gustav could become the first major storm since 2005 to threaten U.S. Gulf oil and gas installations.

U.S. crude for October delivery was up $2.98 at $119.25 a barrel after adding $1.16 on Tuesday. London Brent crude gained $2.31 to $116.94 a barrel.

Oil could head towards last week's near-three-week high of just above $122 a barrel in the next few days depending on Gustav's path, said Masaki Suematsu, analyst at broker Newedge in Tokyo.

"Gustav is headed right toward the centre of the Gulf of Mexico. Hurricanes taking this route are usually threatening," he said.

Gustav was downgraded to a tropical storm on Wednesday after it came ashore in Haiti, but forecasters expect wind speeds to regain hurricane force as it crosses over warm waters south of Cuba.

Most hurricane-path computer models show Gustav headed towards rigs off Louisiana and Texas, home to a quarter of U.S. crude oil and the centre of U.S. refinery operations.

"Between now and the weekend, we could see crude prices encounter a fair measure of support, as the uncertain path of the storm generates the usual consternation," said Edward Meir of brokers MF Global.

Three years ago, Hurricanes Katrina and Rita crippled production in the region.

U.S. dollar weakness, which has contributed to oil's record run this year, provided support to the market. The U.S. currency fell against the euro, after a six-month high the previous day.

Fundamental impact

Tensions between Russia and the West escalated after U.S. President George W. Bush condemned Russia for recognising breakaway regions in Georgia.

"We are not convinced that this crisis will be bullish for the energy markets as any 'punishment' meted out by the West will steer well clear of Russia's energy sector," Meir said.

Oil hit a record peak of $147.27 on July 11, propelled by the weak dollar, investment inflows and concerns about the long-term supply outlook.

But it has fallen back sharply since then partly in response to increased supply from Saudi Arabia, the world's biggest exporter and a drop in demand because of high prices.

On Tuesday, the U.S. Energy Information Administration reported that oil demand in the world's top energy consumer in June fell 5.6 percent from a year ago.

Nobuo Tanaka, executive director of the International Energy Agency, said Saudi Arabia's increase plus a drop in demand especially in the United States had helped prices to fall.

"The market has started responding to fundamentals," he told Reuters. "What I expect from OPEC is to keep pumping at the same level after the increase."

The Organization of the Petroleum Exporting Countries is due to meet next on September 9 to review output levels.

The market is awaiting latest weekly oil inventory data from the EIA, due at 10:35 a.m. EDT (1435 GMT).

A Reuters poll of analysts showed an average forecast for a 1 million-barrel rise in U.S. crude stocks and a 500,000 barrel build in distillates.

Gasoline inventories are projected to fall 2.9 million barrels, a fifth straight weekly decline, as refiners were seen drawing down inventories of summer-grade gasoline.