By Erwin Seba

HOUSTON (Reuters) – More than one-quarter of U.S. Gulf of Mexico offshore oil and gas production remains shut due to Hurricane Sally, and as it moves inland, it is expected to cut fuel demand in the U.S. southeast as forecasters warn of life-threatening flooding.

The storm made landfall on Gulf Shores, Alabama, as a Category Two hurricane on Wednesday morning. Oil prices rose early Wednesday, attributed in part to the expectation of a temporary drop in U.S. production.

Nearly 500,000 bpd of offshore crude oil production and 759 million cubic feet per day (mmcfd) of natural gas output were shut in the U.S. Gulf of Mexico, according to the U.S. Interior Department. That’s roughly one-third of the shut-ins caused by Hurricane Laura, which landed further west in August.

Oil and chemical ports along the Mississippi River were moving to reopen with restrictions and some offshore operators were preparing to return workers to offshore platforms on Thursday.

The hurricane was between Gulf Shores and Pensacola, heading northeast at 3 mph (5 kph), with sustained winds of 100 mph (160 kph), the National Hurricane Center said in an update at around 7 a.m. CDT (1200 GMT).

OIL PRICES RISE

Crude oil futures rose more than 2% on Wednesday, extending the previous session’s gains caused by the shut-ins and an industry report forecasting a drop in U.S. crude stockpiles.

“Even if the weather keeps production shut for a couple of days, the sheer volume of its size is enough for the market to breathe a bit,” said Rystad Energy senior oil markets analyst Paola Rodriguez-Masiu in a comment.

The NHC earlier warned Sally could drop 10 to 20 inches (25-50 cm) of rain and up to 30 inches in some spots. It warned of “catastrophic and life-threatening” flooding along portions of the northern Gulf Coast.

(Reporting by Erwin Seba in Houston and Stephanie Kelly in New York; editing by xxx)