Oil Rallies for Two Consecutive Days On Supply Tightening Measures

Oil prices have continued to rally with a bang, starting Tuesday, amid increasing worries about Europe’s supply tightening measures, a response to Russia’s decision to cut gas supply through the Nord Stream 1 pipeline. 

Russia has tightened its gas supply to Germany since Monday. Gazprom, one of the leading gas suppliers to Europe via the Nord Stream 1 pipeline, stated that it is cutting gas supply to Germany to 20% capacity. Russia’s decision to reduce gas supplies to Europe will leave countries unable to meet their commitment to refill gas storage ahead of the crunch winter demand period. Countries like Germany would have to adopt gas rationing to keep their citizens warm during winter. 

Brent Crude futures for September settlement added to its Monday’s 1.9% gain, rallying by 1.6% or $1.66 to $106.81 per barrel. On the flip side, the U.S. West Texas Intermediate (WTI) crude futures for September delivery rose $1.47 or 1.5% to trade at $98.17 per barrel. Tuesday’s rally followed the 2.1% gain made on Monday. 

The case for diesel and its consequences 

Should there be a shortfall in oil supply, end users may be forced to look for other alternatives, particularly diesel. Unfortunately, this comes with risks, as Russia supplies most of the EU’s diesel fuel. Also, there is every likelihood that the expenses of drivers, who rely on diesel, will rise sharply. 

In the meantime, Germany has stated that it found no technical reason for the latest supply squeeze by the Kremlin, accusing Russia of using the gas supply as a weapon to coerce Europe into supporting what it calls “a special military operation.” 

Europe’s crude oil products and gas supplies have been heavily impacted by Western sanctions and payment disputes with Russia since it invaded Ukraine in February. In contrast, falling demand which is due to the recent high crude and fuel prices, along with Fed’s aggressive tightening policy, has put pressure on oil prices. 

The U.S central bank is expected to increase interest rates by 75 basis points, an indication that came after it wrapped up its policy meeting on Wednesday. Analysts believe any increase in interest rate will slow down economic activities and impact fuel demand growth. 

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