Oil rises for a second day on fears of tight supply

A model of barrels of oil in front of the rising stock chart in this illustration, July 24, 2022. REUTERS/Dado Ruvik/Illustration

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  • Russia’s Gazprom tightens pressure on gas flows to Europe
  • The Fed expected to raise interest rates by 75 basis points on Wednesday
  • Brent’s premium to US crude reached the widest range in three years

TOKYO/SINGAPORE (Reuters) – Oil prices rose on Tuesday for a second day in a row amid growing concerns about shrinking European supplies after Russia, the region’s main oil and natural gas supplier, cut gas supplies through a major pipeline.

Brent crude futures for September settlement rose $1.66, or 1.6 percent, to $106.81 a barrel by 0618 GMT, extending their 1.9 percent gain the previous day.

US West Texas Intermediate crude futures for September delivery rose $1.47, or 1.5%, to $98.17 a barrel, after rising 2.1% on Monday.

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Russia tightened its pressure on gas in Europe on Monday as Gazprom (GAZP.MM) said supplies through its Nord Stream 1 pipeline to Germany would drop to just 20% of capacity. Read more

Russia’s cutting off of supplies will leave countries unable to meet their goals of replenishing natural gas reserves before the winter demand period. Germany, Europe’s largest economy, is facing the possibility of gas rationing in industry to keep its citizens warm during the winter months. Read more

This may prompt end users to exchange their gas for petroleum products, especially diesel. But this also carries risks because Russia supplies the region with the most diesel and prices are expected to rise for drivers who rely on the fuel. Read more

“The rise in gas prices, caused by the pressure of Russian gas, may lead to an additional shift to crude oil from gas and support oil prices,” said Hiroyuki Kikukawa, general manager of research at Nissan Securities.

Crude, oil and gas supplies in Europe have been disrupted by a host of Western sanctions and payment disputes with Russia since its invasion of Ukraine on February 24, which Moscow describes as a “special military operation”.

However, lower demand due to the recent rise in crude oil and fuel prices and the expectation of an increase in interest rates in the US has put pressure on prices.

“The tug of war between concerns about weak demand due to the economic slowdown amid rising US interest rates and concerns about supply risks due to the protracted Russia-Ukraine conflict is likely to continue for some time,” Kikukawa said. In the range of about $100 a barrel.

The US central bank is widely expected to raise interest rates by 75 basis points at the conclusion of its policy meeting on Wednesday. This increase may reduce economic activity and thus affect the growth of demand for fuel. Read more

Analysts from Haitong Futures said that market sentiment oscillates between concerns about supply-side instability and expectations of weaker fuel demand under downward pressure on the global economy.

The gap between the European and international benchmark Brent crude and the US benchmark WTI has widened to levels not seen since June 2019 as easing US gasoline demand weighs on US crude, while supply shortages support Brent. Read more

Jeffrey Haley, chief market analyst at OANDA, wrote in a note: “Despite the discount rate…both contracts have forward curves that are still deeply lags, indicating that immediate physical supplies remain scarce.”

“Russia remains the mainstay in energy, supporting prices, a situation that is unlikely to change anytime soon.”

Spot spot margins for Brent crude were $5 a barrel on Tuesday, its highest level in three weeks. In a lagging market, the forward month’s prices are higher than the forthcoming months’ prices.

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Additional reporting by Yuka Obayashi in Tokyo and Moyo Shu in Singapore; Editing by Christian Schmolinger and Stephen Coates

Our Standards: Thomson Reuters Trust Principles.

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