July 12 (Bloomberg) -- Oil prices rose for the first session in four after the U.S. government reported that 96 percent of Gulf of Mexico production was shut by Hurricane Dennis.

``The oil production losses reported by the government were higher than people expected,'' said Phil Flynn, vice president of risk management with Alaron Trading Corp. in Chicago. ``If we lost that much with Dennis, people are worried about what's going to happen with the next storm.''

Tropical Storm Emily, the fifth storm since the June start of the hurricane season, formed in the Caribbean and could reach the Gulf next week. Daily production from the Gulf was down 1.44 million barrels as of noon yesterday, according to the U.S. Minerals Management Service. Companies were returning crews to Gulf facilities, source of 30 percent of U.S. oil production.

Crude oil for August delivery gained $1.78, or 3.2 percent, to $60.70 a barrel at 1:49 p.m. on the New York Mercantile Exchange. Futures touched $62.10 a barrel on July 7, the highest since trading began in 1983, on concern Dennis might disrupt production for an extended period. Oil is up 54 percent from a year ago.

In London, the August Brent crude-oil futures contract jumped $1.55, or 2.7 percent, to $58.99 a barrel on the International Petroleum Exchange. Brent touched $60.70 a barrel on July 7, the highest since the contract was introduced in 1988.

The U.S. Energy Department report will probably show stockpiles of crude oil declined by 2.8 million barrels in the week ended July 8, according to the median estimate of 11 analysts surveyed by Bloomberg. Gasoline inventories may also have dropped.

Storms

Cindy and Dennis, the third and fourth named storms of the June 1-Nov. 30 Atlantic hurricane season, cut a swathe through the Caribbean and Gulf of Mexico in the past two weeks, killing at least 20 people in Cuba and Haiti, forcing evacuations from homes and oil facilities, and causing damage that storm modelers say may cost insurers billions of dollars.

``The shut-ins from Cindy and Dennis will have implications on both the crude and the oil-products inventories,'' said Marshall Steeves, an analyst with Refco Inc. in New York.

Gasoline inventories probably fell 1 million barrels last week, the Energy Department report will probably show. The department will publish its weekly inventory report at 10:30 a.m. Washington time.

Natural Gas

Natural gas surged as much as 8.1 percent, the biggest fluctuation of any commodity today, amid concern that Gulf of Mexico supplies already reduced by Dennis may be further affected by Emily. The surge in gas prices could raise industrial demand for oil-derived products, which compete with gas to fuel between five and 10 percent of U.S. factories.

The Louisiana Offshore Oil Port, the biggest U.S. import terminal, began unloading cargoes from tankers yesterday after a two-day closure, a port official said. The port, 20 miles off Louisiana, handles about 1 million barrels of crude oil daily.

Shares of BP Plc, the world's second-largest publicly traded oil company, had the largest drop in two months after the company's $1 billion Thunder Horse oil and gas rig in the Gulf of Mexico was damaged by Hurricane Dennis. The rig, which was not scheduled to go into production until later this year, was listing at a 20 degree to 30 degree angle, BP said yesterday.

Temperatures in the U.S. Midwest are forecast to be as much as 8 degrees Fahrenheit (5 Celsius) above normal through July 16, private forecaster Earth Satellite Corp. said. That could raise demand for oil-derived fuels to run power plants.

``We've seen very strong demand on the weather side of the equation,'' Alaron's Flynn said. ``It's been very hot in the Midwest. Couple that with the loss of production and you're going to keep this market on edge.''

EIA Outlook

The U.S. Energy Department increased its estimate of crude- oil prices for the third quarter by 12 percent to an average of $59.17 a barrel, as rising worldwide demand outpaces production.

The third-quarter price for West Texas Intermediate crude oil, the U.S. benchmark, was raised from $52.83 a barrel estimated in June, the department's Energy Information Administration said in its monthly Short-Term Energy Outlook. Oil will average $55.12 a barrel for all of 2005, a 5.4 percent increase from the previous estimate and 33 percent higher than last year.

Crude oil will average $57.50 a barrel in 2006, a 6 percent increase from last month's forecast.

Regular-grade gasoline, averaged nationwide, is projected to cost $2.25 a gallon from April through September, up 8 cents from last month's forecast.

Higher Inflation

European Central Bank council member Nicholas Garganas said record oil prices may force the bank to raise its inflation forecasts and dismissed politicians' calls for lower interest rates.

``The oil price increases in recent weeks imply some upward revision to the main scenario for inflation,'' said Garganas, who is also the governor of the Bank of Greece, in an interview in Athens yesterday. ``The longer these high oil prices last, the higher the risks are to inflation in particular.''

To contact the reporter on this story: Gene Laverty in Calgary at glaverty@Bloomberg.net

Last Updated: July 12, 2005 14:04 EDT