Oil prices today jumped back towards $120 a barrel today as tropical storm Gustav, which experts said was likely to be upgraded again to a hurricane, appeared set on a course for US oil and gas rigs in the Gulf of Mexico.

Crude oil rose $2.98 to $119.25 a barrel after adding $1.16 yesterday. Fears about the path of Gustav and a potential impact on oil production, could see oil near a three-week high of $122 over the coming days.

BP, the UK oil giant, confirmed today that it had begun evacuating non-essential workers from the Gulf of Mexico ahead of the storm.

Traders attributed oil's surge to fears that Gustav could cripple production in the Gulf region if it follows the same path as Hurricanes Katrina and Rita three years ago, which cost the US $100 billion in damage and severely curtailed oil production, adding pressure to prices.

In the four weeks leading up to Katrina and Rita - part of the worst Atlantic storm season in recorded history - oil prices soared. Crude rose $7.76 to $65.51 a barrel on August 19, 2005, two days before Katrina hit New Orleans and Louisiana.

With winds of up to 60 miles an hour Gustav was downgraded to a tropical storm after it came ashore in Haiti, but forecasters expect wind speeds to regain hurricane force as it crosses warm waters off Cuba.

Gustav, which is currently about 90 miles west of the Haitian capital, Port- au-Prince, is forecast to move into the central Gulf of Mexico by Sunday, August 31.

Most meteorological computer models show Gustav headed towards rigs off Louisiana and Texas, home to a quarter of US crude oil and the centre of refinery operations. “Gustav is headed right toward the centre of the Gulf of Mexico," said Masaki Suematsu, an analyst at Tokyo stockbroker in Newedge.

Another factor in the surge in oil prices was some renewed US dollar weakness today. The dollar's rise to a six-month high had helped cap the price of crude recently.

Rising oil prices overshadowed a better-than-expected report in the US into orders for durable goods which jumped 1.3 per cent in July compared to the previous month. The rise was led by a big increase in demand for commercial aircraft.

Durable goods, which also include cars, appliances and machinery, are crucial to the direction of the economy because they not only reflect business spending, but are also an indicator of consumer confidence, which has slumped in the US since the credit crunch began a year ago.

Rising oil prices are a threat to consumer confidence, which a key measure released this week showed to be on the mend. The New York-based Conference Board's confidence index, rose from 51.9 to 56.9 in July. The jump, which beat market forecasts, was attributed to falling petrol prices.

The US commerce department separately reported an unexpected gain in house sales as heavily discounted properties lured bargain hunters back into the market.

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