All eyes are on Gustav's impact on Gulf of Mexico

Abu Dhabi: Tropical Storm Gustav will become Cyc-lone Gustav today (Hurricane Gustav in North America). This could be a very dangerous storm, capable of widespread damage to offshore oil and gas rigs in the Gulf of Mexico, where 40 per cent of United States offshore installations reside, and to property on the mainland.

Around the same percentage of US refining capacity is situated within a few dozen miles of the coastline.

New Orleans is under a mandatory evacuation order, and offshore oil and gas operators have begun evacuating their rigs in anticipation of Gustav's arrival.

All the computer models have generated a convergent result with the cyc-lone tracking directly towards the southern Louisiana Delta region and its dense array of rigs, refineries and offloading facilities.

While cyclones shut oil and gas facilities for several months three years ago, so far, oil and gas prices in New York have risen as much as many would have expected.

But the market has changed its mindset: If this storm had threatened US oil and gas production two months ago prices would likely have taken off skyward, possibly hitting $160 a barrel.

But with its downward bias entrenched, markets have adopted a wait-and-see attitude.

US traders reduced position holding in front of the three-day Labour Day weekend, not wanting to be surprised by Gulf storm developments before trading resumes on Tuesday.

Prices for New York Mercantile Exchange's benchmark West Texas Intermediate - which closely reflects developments in the US Gulf - closed the week at $115.46 after reaching $118.76 intraday. This is just a slight rise over last week's closing price of $114.81.

Local crude

After initially tracking New York market crude oil prices, local crudes returned to reflecting the fundamentals of Gulf supply and demand.

Price signals in the Dubai Mercantile Exchange's DME Oman heavy-sour benchmark were steady, with the nearby contract closing out the week at $111.30, up slightly from last week's $110.50.

Nymex natural gas

All the natural gas contracts traded on Nymex were higher.

Commercial producers earlier last week bought long positions to lock in higher prices in a weakening market. But towards the end of the week prices were rising once again.

With memories of the previous storms that caused month-long shut-ins of gas production and wrecked offshore rigs still fresh in people's minds, prices strengthened.

The Nymex natural gas benchmark closed the week at $7.94 per million Btu, up from $7.84 the previous week, after reaching $8.32 intraday.

But the more distant contracts all gained and are now at a premium to the nearby's. September 2010 gas is at $8.95.

European markets are likely to see natural gas prices increase in the wake of the Georgian crisis.

Nato and the European Commission are determining their next step to confront Russia over its official recognition of the break-away enclaves of Abkhazia and South Ossetia.

Last week China meaningfully refused to recognise them, even though Russia is a major supplier of petroleum to China. Russian petroleum is mostly landlocked and sold to neighbouring states.

The larger ones - Japan, China and India - have other sources from which to draw if pressed to do so, somewhat limiting Russia's ability to dictate to these countries what they should decide.

The writer is an associate professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.