Oil prices shot above $120 a barrel and then pulled back Thursday as traders bet the US government would tap the Strategic Petroleum Reserve if Tropical Storm Gustav disrupts production.
Gustav, approaching Jamaica with winds near 113 km/hr, could regain hurricane strength later Thursday and possibly enter the Gulf of Mexico - home of a quarter of US crude production - as a dangerous Category three storm early next week.
Fearful of a direct hit, oil companies raced to remove workers from vulnerable oil and gas platforms and brace the structures for heavy rain and wind.
The concerns pushed light, sweet crude for October delivery as high as $120.50 a barrel on the New York Mercantile Exchange, but prices later settled $2.56 lower at $115.59.
The whipsaw session was exacerbated by low-volume trading heading into holiday weekend.
In London, October Brent crude fell $2.05 to settle at $114.17 a barrel.
Oil was also being pressured by a government report showing that US natural gas supplies jumped much more than expected last week because of weak demand, sending prices for the fuel plummeting.
Natural gas for October delivery fell 55.8 cents to settle at $8.05 per 1,000 cubic feet.
Atmospheric models showed Gustav heading toward Louisiana and areas devastated by Hurricane Katrina three years ago Friday, though it was too early to pinpoint where it would strike.
The storm not only threatens the more than 4,000 oil and gas rigs scattered throughout the Gulf, but also the dozens of oil refineries dotting the vulnerable coastline from Texas to Louisiana.
Oil's retreat in the face of a possibly dangerous storm surprised some oil market watchers, who attributed the move to speculation that the government could release supplies from the Strategic Petroleum Reserve to counter any drop in production from Gustav.
The US has only twice tapped the emergency reserve in response to disruptions or fears of supply shortages, with the last release from the roughly 700 million barrel stockpile coming in the wake of Katrina.
The International Energy Agency said the 27-member body was prepared to tap its emergency stocks if needed.
"I think that's taking some of the steam out of this rally," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Illinois.
Meanwhile, the exodus from the Gulf by oil workers accelerated.
Royal Dutch Shell PLC has evacuated nearly 400 people and said it will bring in another 270 Thursday.
The company said production will be impacted. BP PLC was also removing personnel from the region that's home to about a quarter of US crude production and much of its natural gas, while Exxon Mobil said it was bracing its structures for heavy wind and rain.
Transocean Inc., the world's largest offshore drilling contractor, said Thursday it had evacuated about 190 workers from five of its 11 offshore drilling rigs in the Gulf. Transocean has 1,550 workers in the region.
Weather research firm Planalytics predicted as much as 80 per cent of the Gulf's oil and gas production could be shut down as a precaution if Gustav enters the region as a major storm.
Gustav formed Monday and roared ashore Haiti Tuesday as a Category one hurricane. The storm triggered flooding and landslides that killed 23 people in the Caribbean. It weakened into a tropical storm, though it is likely to grow stronger in the coming days by drawing energy from warm open water.
Forecasters said Gustav might slip between Mexico's Yucatan Peninsula and the western tip of Cuba on Sunday, then march toward a Tuesday collision with the US Gulf Coast - anywhere from south Texas to the Florida panhandle.
"We know it's going to head into the Gulf. After that, we're not sure," said meteorologist Rebecca Waddington at the National Hurricane Centre.
"For that reason, everyone in the Gulf needs to be monitoring the storm."
Gustav is the first storm of the 2008 Atlantic hurricane season to pose a serious threat to offshore oil and gas installations in the Gulf. In 2005, Katrina and Rita destroyed 109 oil platforms and five drilling rigs.
In other Nymex trading, heating oil futures fell 7.91 cents to settle at $3.1826 a gallon, while petrol futures dropped 4.58 cents to settle at $3.0214 a gallon.
