Oil prices spike as Hurricane Gustav nears Gulf

Oil prices swung rapidly higher Tuesday as Hurricane Gustav threatened major oil operations in the Gulf of Mexico.

After falling close to $112 per barrel in overnight trading, light, sweet crude for October delivery spiked $2.33 to $117.44 a barrel on the New York Mercantile Exchange, a $5 swing.

Already adding support to oil prices was Russia's recognition of independence for two breakaway provinces in Georgia, which is likely to enflame tensions with the west.

In London, October Brent crude rose 1 cent to $114.51 a barrel on the ICE Futures exchange.

Oil prices switched directions several times during Tuesday's session, with the dollar swings seen as mostly responsible for the fluctuations.

"The Dollar Index ... has shown that it can at time override the oil fundamentals ... and will probably dominate until Gustav defines a more definitive path," said Olivier Jakob of Petromatrix in Switzerland.

Oil prices typically rise when the dollar falls, as investors buy commodities as a hedge against inflation and weakness in the U.S. currency.

Although the dollar was still stronger Tuesday than Monday, by the afternoon in Europe it gave back some of its gains from earlier in the session against the euro. The euro had fallen below $1.46, a six-month low, but later climbed back to $1.4635.

At the same time, the dollar also lost some ground within the session against the Japanese yen, to 109.55 yen compared with 109.78 earlier, but still up from 109.35 on Monday.

Tropical storm Gustav became a hurricane Tuesday as it approached Haiti's southern coast, and is also on track to hit Cuba.

Forecasters said the hurricane's maximum sustained winds were near 90 mph Tuesday morning, with higher gusts. They said it could become a Category 2 hurricane with winds of 96 mph or higher before hitting Haiti.

"It's hard to predict where Gustav will strike," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "But the market is reacting to it and edging up."

Haitians were told to prepare for evacuations as the storm formed Monday in the Caribbean. Haiti upgraded storm warnings to hurricane warnings along much of its coast as Gustav closed in from the south.