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Oil hit $68 as Rita threatens supply

Reuters | September 21, 2005
By Simon Webb

LONDON () - Oil prices hit $68 a barrel on Wednesday as Hurricane Rita threatened to add to U.S. energy supply woes by hammering Gulf of Mexico rigs, pipelines and Texas refineries.

Rita overshadowed OPEC's decision on Tuesday to offer every barrel of its spare capacity to the market in an attempt to control surging prices.

U.S. light crude <CLc1> rose $1.80 to $68 a barrel, its highest level for three weeks. Oil prices have risen $5 this week.

Rita was strengthening as it moved over the eastern Gulf of Mexico, and was forecast to make landfall over Texas by the weekend, the U.S. National Hurricane Center said.

Satellite imagery suggested the storm had reached category four strength, the second strongest category on the Saffir-Simpson scale, the Center said.

The hurricane threatened to shut facilities unaffected by Hurricane Katrina, which devastated the Gulf coast of Louisiana and Mississippi three weeks ago and pushed oil to a record high of $70.85 a barrel.

Texas is home to some of the largest plants in the U.S., and accounts for a quarter of the refining capacity in the world's largest energy consumer.

U.S. refineries were still struggling to meet U.S. demand after Katrina, which disrupted supplies so badly that international reserves had to be tapped.

"This is a volatile market which is extremely jittery about supply shocks," said Justin Smirk, senior economist at Westpac in Sydney. "The hurricane season is still in full-swing and the market can only focus on that right now."

Gasoline futures <HUc1> rose 10.34 cents to $2.08 a gallon. Gasoline has risen over 16 percent this week.

Four refineries remained shut after Katrina. Exxon Mobil <XOM.N> said it had to scale back repair work on one of those refineries due to another evacuation of the devastated New Orleans area ahead of Rita.

Oil companies reported hundreds of workers had been evacuated from offshore Gulf of Mexico production facilities, which account for one third of U.S. oil production.

OPEC EFFECT SHORT-LIVED

With the latest hurricane halting efforts to restore U.S. Gulf oil production closed by Katrina, OPEC's offer of its entire 2 million barrels of spare capacity could only dampen prices for a matter of hours.

Non-OPEC member Mexico also pledged to maximize production in response to the current market climate.

But most analysts are skeptical that such efforts can have an impact given that fundamental constraints lie in refined oil products rather than crude itself.

"It doesn't matter how much crude you pump in, you won't have a meaningful effect on prices if you can't get refined product out," said Westpac's Smirk.

Another potential flashpoint for global supplies arose in Nigeria as militant group in the Niger Delta threatened mayhem if they fail to receive word from their leader by 1300 GMT.

The delta accounts for most of Nigeria's around 2.4 million barrels per day oil output. Production has been cut in the past because of conflicts between rival armed groups or between militants and government forces.

The Niger Delta People's Volunteer Force said oil workers should leave the region if they have not heard from the leader whom they said had been arrested.

U.S. oil stock data due out later on Wednesday was expected to show a small impact from Hurricane Katrina last week.

U.S. gasoline and distillate stocks were each expected to fall 200,000 barrels, a Reuters survey of analysts found.

Crude stocks were expected to rise 200,000 barrels after imports got back to normal following Katrina.


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