Fears about the storm pushed crude oil above $120 a barrel Thursday, but prices later fell into negative territory as traders bet the government will tap the Strategic Petroleum Reserve if supplies are threatened.
Regardless of where the storm hits though, gas prices look to be headed higher.
"Prices are going to go up pretty soon. You're going to see increases by 5, 10, 15 cents a gallon," said Tom Kloza, publisher and chief analyst at the Oil Price Information Service in Wall, N.J.
That's because supply worries over Gustav have pushed wholesale gas prices up nearly 40 percent along the Gulf in the last few days, meaning struggling filling stations -- even those far away from states like Louisiana and Texas -- will have little choice but to pass on the costs by ratcheting up prices at least temporarily.
Gas prices have dropped steadily over the last month as crude has eased from record levels. A gallon of regular gas shed about half a penny overnight to a new national average of $3.66 -- 11 percent off the all-time high of $4.114 a gallon reached last month.
But if Gustav does major damage to supplies, consumers could see that record shattered.
"If we have a Katrina-type event, you're talking about gas prices going up another 30 percent," said Kloza, whose firm tracks U.S. gas prices by surveying thousands retail outlets around the nation.
Gustav, approaching Jamaica with winds near 70 mph, could regain hurricane strength later Thursday and possibly enter the Gulf of Mexico -- home of a quarter of U.S. crude production -- as a dangerous Category 3 storm early next week.
Oil companies raced to remove workers from oil and gas platforms and braced structures for withering 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 the holiday weekend.
Still, 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 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, Ill.
Oil was also being pressured by a government report showing that U.S. 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.
Further weighing on oil prices was speculation that demand for energy could fall further if Gustav makes landfall.
"If people start canceling their vacations to the Gulf because of the storm, we're probably going to have less demand for fuel than anticipated," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.
Atmospheric models showed Gustav heading toward Louisiana and areas devastated by Hurricanes 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.
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 U.S. crude production and much of its natural gas, while ExxonMobil 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 percent 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 1 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.
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 gasoline futures dropped 4.58 cents to settle at $3.0214 a gallon.
In London, October Brent crude fell $2.05 to settle at $114.17 a barrel.