Oil Prices Close Above $80 for First Time on Hurricane Landing, Refinery Worries

Oil prices finished above $80 a barrel for the first time Thursday and gasoline prices rose as refiners reported production problems after Hurricane Humberto hit Texas.

Oil first traded over $80 a barrel on Wednesday after the Energy Department reported declines in crude and gasoline inventories and a drop in refinery activity, but ended the day below that psychologically important mark.

On Thursday, Humberto added to the supply concerns by cutting power to several refineries in the Port Arthur, Texas, area. Another tropical system gaining strength in the Atlantic also supported prices.

Light, sweet crude for October delivery finished at a record $80.09, up 18 cents on the New York Mercantile Exchange and above the previous record close of $79.91 set a day earlier.

Despite the gains, oil is still well below inflation-adjusted highs hit in early 1980. Depending on the adjustment, a $38 barrel of oil in 1980 would be worth $96 to $101 or more today.

In addition to closing at a record high, the October oil contract also set an intraday record of $80.20 a barrel on Thursday, 2 cents above the previous trading high set Wednesday.

In London, October Brent crude fell 28 cents to settle at $77.40 a barrel on the ICE futures exchange.

The shuttered refineries included Valero Energy Corp.'s 325,000 barrel-per-day facility, Total SA's 180,000 barrel-per-day plant and Motiva Enterprises LLC's refinery, which can process 285,000 barrels of oil a day.

Exxon Mobil Corp. said its 350,000 barrel-per-day Beaumont, Texas, refinery suffered a minor production outage but remained up and running.

The outages boosted October gasoline 3.04 cents to settle at $2.0464 a gallon.

Humberto lost strength Thursday and was downgraded to a tropical storm. Traders appear more concerned about the Atlantic storm, which the National Hurricane Center is calling Tropical Depression Eight. While the storm's course remains unclear, energy investors get worried any time a tropical storm or hurricane threatens key oil and gas infrastructure in the Gulf of Mexico.

Oil's run-up has come despite OPEC's decision on Tuesday to boost output by 500,000 barrels, a move driven in part by concerns that high oil prices are hurting the global economy. Many analysts are perplexed by the high prices, arguing that they have been driven by a flood of speculative buying. Many believe demand does not support such high prices.

"The world economy in the last few years has shown to be quite resilient to strong oil pricing, but this is certainly a new territory for crude oil and if sustained there is bound to be some impact on the economy," said Victor Shum, an energy analyst at Purvin & Gertz in Singapore.

James Cordier, president of Liberty Trading Group in Tampa, Fla., notes that oil prices often peak in September, and follow demand lower in the fall.

"We're really wondering where demand will come from to support $80 crude oil," Cordier said.

In other Nymex trading, heating oil futures lost 0.01 cent to settle at $2.219 a gallon.

Natural gas lost 40.9 cents to settle at $6.029 per 1,000 cubic feet after the government reported that inventories grew by 64 billion cubic feet last week, slightly more than the 62 billion cubic feet analysts had expected.

At the pump, meanwhile, gas prices slipped 0.7 cent overnight to a national average of $2.808 a gallon, according to AAA and the Oil Price Information Service. Retail prices, which typically lag the futures market, peaked at $3.227 a gallon in late May.

Analysts say much of the recent advance in crude prices has been due to buying by large investment funds. The low dollar, which encourages buying by foreign investors, has also played a role.

"Most large financial institutions have gone long on crude, and each new high tested equates to substantial profits," wrote Simon Wardell, an energy analyst at Global Insight in London, in a research note.

But such jumps in speculative buying often carry their own seeds of destruction, notes Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Ill.

"At some point, a saturation level will be achieved as was the case at the end of July when the net long fund position peaked," Ritterbusch wrote.

After oil hit then-record trading prices above $78 a barrel on Aug. 1, futures dropped to the $69 level in a few weeks.

Despite oil's run, Cordier doesn't believe gas prices will rise substantially. Gasoline demand typically drops in the fall, and beginning Saturday, refiners will be able to sell cheaper winter-grade gasoline.

"Gasoline just really has a difficult time staying high this time of year," said Cordier.