Fears are mounting that Russia may restrict oil deliveries to Western Europe over coming days, in response to the threat of EU sanctions and Nato naval actions in the Black Sea. Any such move would be a dramatic escalation of the Georgia crisis and play havoc with the oil markets. Reports have begun to circulate in Moscow that Russian oil companies are under orders from the Kremlin to prepare for a supply cut to Germany and Poland through the Druzhba (Friendship) pipeline. It is believed that executives from lead-producer LUKoil have been put on weekend alert. “They have been told to be ready to cut off supplies as soon as Monday,” claimed a high-level business source, speaking to The Daily Telegraph. Any move would be timed to coincide with an emergency EU summit in Brussels, where possible sanctions against Russia are on the agenda. Any evidence that the Kremlin is planning to use the oil weapon to intimidate the West could inflame global energy markets. US crude prices jumped to $119 a barrel yesterday on reports of hurricane warnings in the Gulf of Mexico, before falling back slightly. Global supplies remain tight despite the economic downturn engulfing North America, Europe and Japan. A supply cut at this delicate juncture could drive crude prices much higher, possibly to record levels of $150 or even $200 a barrel. With US and European credit spreads already trading at levels of extreme stress, a fresh oil spike would rock financial markets. The Kremlin is undoubtedly aware that it exercises extraordinary leverage, if it strikes right now. Such action would be seen as economic warfare but Russia has been infuriated by Nato meddling in its “backyard” and threats of punitive measures by the EU. Foreign minister Sergei Lavrov yesterday accused EU diplomats of a “sick imagination”. Armed with $580bn of foreign reserves (the world’s third largest), Russia appears willing to risk its reputation as a reliable actor on the international stage in order to pursue geo-strategic ambitions. “We are not afraid of anything, including the prospect of a Cold War,” said President Dmitry Medvedev. The Polish government said yesterday that Russian deliveries were still arriving smoothly. It was not aware of any move to limit supplies. The European Commission’s energy directorate said it had received no warnings of retaliatory cuts. Russia has repeatedly restricted oil and gas deliveries over recent years as a means of diplomatic pressure, though Moscow usually explains away the reduction by referring to technical upsets or pipeline maintenance. Last month, deliveries to the Czech Republic through the Druzhba pipeline were cut after Prague signed an agreement with the US to install an anti-missile shield. Czech officials say supplies fell 40pc for July. The pipeline managers Transneft said the shortfall was due to “technical and commercial reasons”.

Supplies were cut to Estonia in May 2007 following a dispute with Russia over the removal of Red Army memorials. It was blamed on a “repair operation”. Latvia was cut off in 2005 and 2006 in a battle for control over the Ventspils terminals. “There are ways to camouflage it,” said Vincent Sabathier, a senior fellow at the Centre for Strategic and International Studies in Washington. “They never say, ‘we’re going to cut off your oil because we don’t like your foreign policy’.” A senior LUKoil official in Moscow said he was unaware of any plans to curtail deliveries. The Kremlin declined to comment.

With Hurricane Gustav on course to hit the US Gulf of Mexico coast, the damage it does to the region’s oil facilities could be a “worse case scenario”. The stark warning comes from extreme weather impact analyst Jim Roullier, who says Gustav may be more damaging than 2005’s Hurricane Katrina. Output from oil rigs in the US Gulf has already been cut by three-quarters, as staff continue to be evacuated. The region produces 25% of the US’s crude oil and 15% of its natural gas. About 4,000 offshore oil and gas facilities are located in the US gulf, 100 of which were badly damaged three years ago by Katrina and the follow on Hurricane Rita. “This storm will be more dangerous than Katrina,” said Mr Roullier, of Planalytics. “I think this storm will prove to be a worse case scenario for the production region.”

Forecasters predict that Gustav will hit the central Louisiana coast west of New Orleans by late Monday or early Tuesday. Concern about the impact of Gustav is likely to push global oil prices higher when trading resumes on Monday. Crude prices had increased last week as concern mounted about Gustav, before finishing slightly down on Friday. US light sweet ended Friday 13 cents lower to $115.46 a barrel, while London’s Brent closed down 12 cents to $114.05. However, it is important to remember that global demand for oil has eased since record highs of more than $147 a barrel were hit back in July. The mayor of New Orleans, Ray Nagin, has already ordered the evacuation of the city. In 2005, three-quarters of the city was flooded by Rita after a storm surge breached its protective levees.

Prompt British gas prices eased on ample supply on Friday morning, while curve gas contracts and prompt power climbed. Gas for delivery on Friday dipped to 51.75 pence per therm, down about 4.25 pence from the previous close, while contracts for weekend delivery fell a penny to 52.00 pence as increased flows from the North Sea left the system awash with gas. But baseload power for Monday traded at around 84 pounds per megawatt hour, with power supply margins looking tight for the start of next week, according to data from National Grid. But traders said power market trade was very thin. Winter 08 gas contracts were slightly firmer on Friday morning than at the close on Thursday at around 101.75 pence, while Winter 09 gas dipped 0.75 to 101.75 pence. Carbon emissions rights prices for December 2008 also fell, down 22 euro cents at 24.95 euros.

Two more energy firms have said they will increase gas and electricity prices, blaming higher wholesale costs. Scottish Power said it would raise gas prices by an average of 34% and electricity prices by 9%, effective from Monday 1 September. Soon after, Npower said domestic customers would see an average rise of 14% for electricity and 26% for gas, effective immediately.

Scottish Power said it was “forced to follow other energy providers”. “These are difficult times and we understand the financial impact this announcement will have on our customers,” said Willie MacDiarmid, Scottish Power’s director of energy retail. He added that the volatility in the gas market was contributing to higher UK domestic prices. Dual fuel customers will see their bills increase by an average of 25%. Scottish Power also said it planned to spend £40m on steps to help protect vulnerable customers over the next three years. The firm, owned by Spain’s Iberdrola, is to invest £2.8bn from 2008 to 2010.

Npower said: “Today’s price rises are due to massive increases in wholesale costs which make current pricing levels unsustainable, following a price decrease in 2007 and an increase at the start of 2008.” “Until today Npower’s domestic gas prices were still the same level they were 18 months ago – whereas, during this time, the cost of wholesale gas has doubled,” said the firm. Many pensioners, already worrying about whether they can afford to heat their homes this winter, will be outraged by news of yet more colossal price hikes.

UK Coal said a 45% rise in the market price of coal since the start of the year had transformed the outlook for its mining operation. The operator of four deep pits reported half-year losses but said “significantly higher production at a significantly higher sales price” left it on course to meet market hopes for full-year profits of around £70 million. The company is Britain’s biggest producer of coal, supplying around 15% of all the coal burned – equivalent to the energy needed to provide 5% of the country’s electricity needs. It also owns 46,500 acres of land, of which around 3,700 acres are currently targeted for development. UK Coal said demand remained strong because UK electricity generators viewed coal as more profitable to burn than gas. The average sale price in the first half of the year rose 18% to £1.79 per gigajoule, but UK Coal said some production sold on the open market for up to £4. The expected average price for the second half is near £2. Total sales of 3.7 million tonnes was down in the first half, which UK Coal said reflected the timing of face changes at Kellingley, West Yorkshire and Welbeck, Nottinghamshire. Output was also committed to satisfying older contracts, limiting the benefit of higher prices. Bottom-line losses for the half year were £9.9 million against profits of £40.6 million in the same period a year earlier. UK Coal chairman David Jones said the company was confident of meeting expectations for the full year and viewed the future with optimism. He added: “The sharp increase in the market price of coal, up around 45% from the start of the year to the end of July, and its strong forward curve, transforms the outlook for our mining operations.”

Crude Oil rose for a third day on forecasts Tropical Storm Gustav will strengthen as it enters the Gulf of Mexico, home to 26 percent of U.S. production. Gustav is expected to return to hurricane status before reaching Gulf platforms, according to Jim Rouiller, a senior energy meteorologist with Planalytics Inc., a forecaster based in Pennsylvania. U.S. gasoline inventories probably fell a fifth week, dropping 2.45 million barrels, according to a Bloomberg survey before today’s Energy Department report. The threat of storms like Gustav will prevent oil prices falling further, so we see the market supported above $110 until the end of the hurricane season, said Ingrid Angermann, an economist at Dresdner Bank AG in Frankfurt. Crude oil for October delivery rose as much as $2.26, or 1.9 percent, to $118.53 a barrel on the New York Mercantile Exchange. It was trading at $118.13 at 1:40 p.m. London time. Prices are up 63 percent from a year ago. Futures have dropped 21 percent from a record $147.27 a barrel reached on July 11. Yesterday, oil rose $1.16, or 1 percent, to settle at $116.27 a barrel. OPEC, the producer of 42 percent of the world’s oil, should maintain output when it meets in Vienna next month to help curb prices, International Energy Agency Executive Director Nobuo Tanaka said.

Dollar Drop

The dollar fell from a six-month high against the euro, bolstering the appeal of commodities as a hedge. The dollar declined to $1.4764 per euro at 1:16 p.m. in London from $1.4653 in New York yesterday, when it touched $1.4571, the strongest since Feb. 14. Gustav was about 80 miles (125 kilometers) west of the Haitian capital, Port-au-Prince, and forecast to head into the central Gulf of Mexico by Aug. 31, the National Hurricane Center said in an advisory at 5 a.m. Miami time. Gustav has the potential to grow to a Category 4 hurricane with winds of at least 131 miles per hour by the time it enters the Gulf, said Planalytics’s Rouiller, whose clients include oil companies. Offshore fields in the Gulf of Mexico accounted for 26 percent of total U.S. crude production and 12 percent of natural gas output in April, according to data on the Web site of the government’s Energy Information Administration.

Marketing spend in the energy sector has swelled by more than 25% this year, coinciding with unprecedented increases in the price of fuel to consumers. The UK’s top six energy firms – British Gas, Npower, E.ON, EDF Energy, Scottish Power and Scottish and Southern Energy – collectively spent a record £58.5m on marketing from January and June, compared with £46.4m over the same period last year, according to Nielsen Media Research.According to comparison site uSwitch, the average increase in the cost of gas has been 28%, while electricity prices have shot up by 20%. The escalation in marketing spend has been criticised by groups concerned by the price of fuel. A spokesman for the Child Poverty Action Group, said: ‘Pumping up the marketing budget while cutting social assistance to these households is adding insult to injury.’ Adam Scorer, a spokesman for Energywatch, noted a correlation between price hikes and marketing activity. ‘At a time when bad deals are set to get even worse, companies will make sure that consumers know about the limited competition in the market,’ he said. EDF defended its spending hike, saying energy had ‘moved from being a commodity to being a brand’, making marketing more important. The industry regulator, Ofgem, declined to comment, but said it was conducting an investigation into the commercial activities of energy firms and would publish its findings at the end of next month.