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Gustav Biggest Threat to Gulf Oil Since Katrina

The oil market's taking notice that Hurricane Gustav could be the first major storm to wreak havoc with Gulf of Mexico oil production areas in several years, and it should be clear by the weekend just how serious that threat could be.

"This could be the most significant storm in that area since Katrina and Rita" in 2005, said John Kilduff, M.F. Global senior vice president.

Oil prices are up today on both concern about Hurricane Gustav and on increasing geopolitical tension, as Russia formally recognized the breakaway Georgian regions. Gustav is a category one hurricane and could soon reach category two level. Natural gas futures were also up sharply.

Oil , though, is off its highs for the day, and GRZ Energy's Anthony Grisanti told CNBC's Rebecca Jarvis at the NYMEX that some models are showing that the hurricane could cross the Gulf south of the oil production areas, reducing the risk.

"I think the bottom's in for now. I don't see $115 (per barrel) being tested," said Kilduff, a CNBC contributor. "The storm situation may be serious enough to get us back over $120 and possibly maintaining that level."

Hurricane Gustav
CNBC.com
Hurricane Gustav

Aaron Studwell, senior manager of research and analytics atWeather Insight, said there's an approximately 70 to 75 percent chance the storm will track through oil production areas. The models currently show a 70 percent chance Gustav will hit the central Gulf Coast by early next week, he said. That would be an area from the Louisiana-Texas border over to Biloxi, Miss. and Mobile, Ala. Florida, so far, is not a likely target. There is a 30 percent chance it will hit Texas.

"I see a strong category 3 by Sunday...it would just be going past the western tip of Cuba so the low lying areas of Cuba and the Caymans are now in play," he said.

But where it goes from there is still unclear. That National Hurricane Center's official forecast has Gustav entering the Gulf by Sunday morning. But the Center notes there is a "large amount of spread" in the models beyond this Friday, and some models have the storm hitting the Yucatan Peninsula instead.

Shell Oil said it is making logistical arrangements to evacuate Gulf staff who are not essential to production or drilling. It said evacuations could start Wednesday; as of now, there is no impact on production.

"Two forecast models are showing winds in excess of 150 miles per hour when it enters the Gulf," Studwell said. While there are a dozen models, Studwell said the warm Gulf waters could energize the storm and that would ramp up its wind power.

"They're kind of outliers. They are eye-catching but I'd definitely think that's possible," he said of the high wind forecasts.

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Oil Producers & Refiners:

Royal Ductch Shell

Exxon Mobil

Chevron

Valero

Marathon

Questions? Comments? marketinsider@cnbc.com

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