Oil prices rallied by about 5 per cent overnight, extending their gains from early trading on Monday following US President Joe Biden’s visit to the Middle East and amid tight market conditions as well as reports that Russia's Gazprom informed some European customers that it cannot guarantee gas supplies, leading to a knock-on effect on crude prices.
Brent, the benchmark for two thirds of the world's oil, was trading 0.36 per cent at $106.70 at 11.21am UAE time on Tuesday. West Texas Intermediate, the gauge that tracks US crude, was up 0.48 per cent to $103.10 a barrel.
The rise in prices came after Saudi Arabia said any decision on boosting production would need to take place within the framework of the Opec+ alliance and that it would not have any additional production capacity beyond the 13 million barrels per day it is aiming for by 2027.
Prices also increased as Russian state-owned energy company Gazprom declared a force majeure on gas supplies to some of its customers, according to Bloomberg and Reuters reports.
A disruption of Canadian oil to US refiners through the Keystone pipeline and a majeure declaration by TC Energy due to power cuts at a pumping station also caused crude prices to increase.
Force majeure is a legal measure allowing companies to free themselves from contractual obligations due to circumstances beyond their control.
Gazprom's force majeure on some major European customers “raised fears that gas flows would not return through the Nord Stream 1 pipeline to Germany at the end of the week, causing a knock-on impact on oil prices”, said Jeffrey Halley, a senior market analyst at Oanda.
“The underlying supply-demand imbalance is as tight as ever. Oil prices may have peaked but they certainly don’t look like they are going materially lower from here, unless we get a huge surprise from Opec+.”
Opec+, led by Saudi Arabia and Russia, is set to meet on August 3 but it is unlikely that the group will deviate from its consensus and gradual approach to bringing back more supply to the market.
Output is also constrained as some producers are unable to meet their targets due to underinvestment in energy infrastructure or other capacity limitations.
At its last meeting on June 30, the 23-member super group of producers agreed to stick to its output plan of adding 648,000 barrels per day of crude to the market in August as supply remains tight.
Opec+, has been shepherding crude markets since 2016 and achieved a historic reduction of 9.7 million bpd between May 2020 and July 2021.
However, since the beginning of the Ukraine war in February, the alliance has maintained that the volatility in oil markets was not being caused by fundamentals and blamed higher prices on geopolitical factors beyond the group’s control.
During his address to the US-Arab summit in Jeddah, Saudi Crown Prince Mohammed bin Salman repeated that the kingdom, the world's biggest exporter of crude, will not have any additional production capacity beyond the 13 million barrels per day it is aiming for by 2027.
World oil demand is expected to exceed pre-coronavirus levels in 2022 but the Russia-Ukraine war, coronavirus-related developments and inflationary pressures are posing headwinds.
Risks remain skewed to the upside if Russian gas does not start flowing back to Europe at the end of this week, Mr Halley said.
Russia shut down its main Nord Stream 1 pipeline for 10 days starting July 11 for planned maintenance, and there were fears that it would use the opportunity to close it for good as a result of Moscow's stand-off with western powers over its military offensive in Ukraine.
Oli prices have remained volatile this year, feeding into rising inflationary pressures, while global recession fears have pulled prices down from their near $140 high in March.
“Recession worries are what pull the oil prices lower … we expect to see solid resistance into the $108/$110 area,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
For Naeem Aslam, chief market analyst at Avatrade, the important price point remains $100.
“We believe that traders should keep a close eye on this price mark as this really differentiates the price action from being bullish to bearish,” he said.