Oil prices increased for a second day on Tuesday, as concerns about constraining European supply grew after Russia, the region’s main energy provider, stopped gas flow through a major pipeline.

Brent crude futures were up $1.25, or 1.2 percent, to $106.40 a barrel at 1359 GMT, adding to the previous day’s 1.9 percent rise.

WTI crude futures in the United States were up 98 cents, or 1%, at $97.68 after rising 2.1 percent on Monday.

On Monday, Russia tightened its grip on Europe by announcing that supplies through the Nord Stream 1 pipeline to Germany would be reduced to only 20% of capacity.

Because of the supply disruption, countries will be unable to reach their goals for replenishing natural gas storage ahead of the winter. Germany, Europe’s largest economy, may be forced to ration gas to industry in order to keep its residents warm over the winter.

“The announcement revived fears that Russia, despite its cynical denial, will not shy away from using its energy as a weapon in order to gain concessions in its war against Ukraine and … could probably expect short-term success,” said Tamas Varga of oil brokerage PVM.

The European Union has often accused Russia of using energy coercion, while the Kremlin claims that gaps are the result of maintenance problems and Western sanctions.

On Tuesday, EU energy ministers adopted a proposal for all EU countries to reduce gas use by 15% voluntarily from August to March.

Since the February 24 invasion of Ukraine, which Moscow describes as a “special military operation” Europe’s crude, oil product, and gas supplies have been hampered by a mix of Western sanctions and payment issues with Russia.

Nonetheless, reducing demand as a result of recent high oil and fuel costs, as well as the likelihood of an increase in interest rates in the United States, have put downward pressure on pricing.

The Federal Reserve of the United States is largely expected to raise interest rates by 75 basis points at the end of its policy meeting on Wednesday. This rise may dampen economic activity and lower fuel demand.

According to Morgan Stanley, 77 percent of global central banks have raised interest rates in the last six months, “making this the most-synchronised cycle of rate hikes since the early 1980s”

The bank reduced its demand growth expectations for this and next year. It predicts Brent crude prices of $110 per barrel in the third quarter and WTI prices of $107.50, both of which are $20 lower than the bank’s earlier projections.

The spread between European and international oil benchmark Brent and US benchmark WTI has expanded to levels not seen since June 2019, as falling gasoline demand weighs on US crude while tight supply supports Brent.

On Tuesday, Brent inter-month spreads topped $5 per barrel, the largest in three weeks. Front-month prices are higher than future-month prices in a backwardated market.

Source: Reuters

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