Oil increases for a second day due to supply concerns

Oil increases for a second day due to supply concerns

Reuters, Tokyo/Singapore - Tuesday saw an increase in oil prices for a second day due to growing fears about a tightening of the European supply after Russia, a significant supplier of natural gas and oil to the area, halted supply through a significant pipeline.

By 0618 GMT, Brent crude futures for September settlement were up $1.66, or 1.6 percent, to $106.81 per barrel, continuing a day earlier increase of 1.9 percent.

After rising 2.1 percent on Monday, U.S. West Texas Intermediate (WTI) oil futures for September delivery jumped $1.47, or 1.5 percent, to $98.17 a barrel.

On Monday, Gazprom (MCX:GAZP) announced that shipments through the Nord Stream 1 pipeline to Germany would reduce to just 20% of capacity, tightening Russia's grip on Europe's gas market.

Russia's reduction in supplies will prevent countries from refuelling natural gas reserves in time for the winter demand season. The biggest economy in Europe, Germany, may have to limit gas to industry in order to keep its people warm over the winter.

End users might start switching from gas to oil products, especially diesel, as a result of this. However, there are hazards involved because most of the region's diesel fuel is supplied by Russia, and the cost of fuel for drivers who rely on it is anticipated to increase.

According to Hiroyuki Kikukawa, general manager of research at Nissan (OTC:NSANY) Securities, "higher gas prices, prompted by Russia's gas squeeze, could lead to increased switching to crude from gas and support oil prices."

Since Russia's invasion of Ukraine on February 24—which Moscow refers to as a "special military operation"—a combination of Western sanctions and payment disagreements with Russia has interrupted Europe's supplies of petroleum, oil products, and gas.

Nevertheless, prices have been pressured by decreased demand brought on by recent spikes in oil and fuel prices as well as expectations of an increase in interest rates in the US.

"A tug-of-war between fears of weakening supply risk owing to the protracted Russia-Ukraine conflict and fears of declining demand due to the economic downturn despite rising U.S. interest rates will likely persist for some time," Kikukawa said, forecasting WTI to trade in a band around $100 a barrel.

The end of the U.S. central bank's policy meeting on Wednesday is largely anticipated to result in a 75 basis point increase in interest rates. That increase might lessen economic activity, which would affect the rise in fuel consumption.

According to analysts from Haitong Futures, market sentiment is fluctuating between worries about supply-side instability and projections for weaker gasoline demand as a result of the world economy's downward pressure.

As the United States' weakening gasoline demand drags on U.S. crude while Brent is supported by a tight supply, the difference between the European and international oil benchmark Brent and the U.S. benchmark WTI has expanded to levels not seen since June 2019.

According to Jeffrey Halley, senior market analyst at OANDA, "despite the price discount, both contracts have futures curves that remain in deep backwardation, signalling that prompt physical supplies remain tight."

Russian energy policy continues to be unpredictable, sustaining prices, and this is unlikely to change very soon.

On Tuesday, prompt Brent inter-month spreads rose to $5 per barrel, the highest level in the previous three weeks. Prices in the front month are greater than prices in the following months in a backwardated market.