Oil prices are bullish in the London trading session today, for a second day with the global benchmark, the brent oil futures pushing over $100 per barrel. This comes on increasing concerns about tightening European supply after Russia, a key oil and natural gas supplier to the region, which cut gas supply through a major pipeline.
The global benchmark, the Brent crude futures, is currently bullish by 1.36%, currently trading at $101.67 a barrel, extending a 1.9% gain in the previous day. The U.S. benchmark, the West Texas Intermediate (WTI) crude futures, is up 1.50%, currently trading at $98.13 a barrel, having gained 2.1% on Monday.
Russia tightened its gas squeeze on Europe on Monday as Gazprom, an oil and gas company in Russia, said supplies through the Nord Stream 1 pipeline to Germany would drop to just 20% of capacity.
What you should know
- Russia’s cut in supplies will leave countries unable to meet their goals to refill natural gas storage ahead of the winter demand period. Germany, Europe’s biggest economy, faces potentially rationing gas to industry to keep its citizens warm during the winter months.
- This could prompt end-users to swap their gas for oil products, particularly diesel. But this also carries risks since Russia supplies most of the region’s diesel fuel, and prices for drivers who depend on the fuel are expected to rise.
- Hiroyuki Kikukawa, general manager of research at Nissan Securities, stated, “Higher gas prices, triggered by Russia’s gas squeeze, could lead to additional switching to crude from gas and support oil prices.”
- Europe’s crude oil product and gas supplies have been disrupted by a combination of Western sanctions and payment disputes with Russia since its Feb. 24 invasion of Ukraine, which Moscow calls a “special military operation.”
- Also, the falling demand as a result of the recent high crude and fuel prices, coupled with the expectation of an increase in interest rates in the United States have as well, weighed in on oil prices.
- On this, Kikukawa explained, “A tug-of-war between concerns about weakening demand due to the economic slowdown amid rising U.S. interest rates and fears of supply risk because of prolonged Russia-Ukraine conflict will likely continue for some time.” He also predicted that the WTI will trade in a range of around $100 a barrel in the short term.
- The U.S. central bank is widely expected to raise interest rates by 75 basis points at the conclusion of its policy meeting tomorrow. The increase, if it happens, is expected to reduce economic activity and thus impact fuel demand growth.
The gap between European and international oil benchmark Brent and U.S. benchmark WTI has widened to levels not seen since June 2019 as easing gasoline demand in the United States weighs on U.S. crude, while tight supply supports Brent.