Oil Gains as US Sanctions Hit Russian Crude Supplies
Key Points:
* West Texas Intermediate (WTI) rose almost 1% to $73 a barrel.
* Sanctions against Russia are hindering crude supplies, leaving millions of barrels stranded.
* China receives Russian crude at larger discounts, while Middle Eastern premiums increase.
* Commerzbank analysts predict upside potential for oil prices due to sanctions.
* Surge in European natural gas prices makes oil burning more cost-effective.
* Trump's stance on the Israel-Hamas ceasefire raises geopolitical risks.
West Texas Intermediate (WTI) extended gains, rising nearly 1% to approach $73 a barrel. This furthered Monday's 1.9% advance, the largest in nearly four weeks. The price increase is attributed to the impact of US sanctions on Russian crude supplies.
Multiple million barrels from Russian platforms in the Pacific remain stranded following the blacklisting of shuttle tankers transporting them to China. According to individuals familiar with the data, Russia's crude output in June fell below its OPEC+ quota.
Chinese refiners are receiving Russian crude at greater discounts as the sanctions take hold, while premiums for Middle Eastern crude are rising. Carsten Fritsch of Commerzbank and his colleagues emphasized in a note that "the effects of the tightened sanctions against Russia and Iran on the oil supply appear to be underestimated." They believe this, combined with a recent reduction in bullish wagers, presents "upside potential for oil prices in the coming weeks."
Earlier gains were somewhat pared back after Federal Reserve Chair Jerome Powell indicated that the central bank did not need to rush into lowering interest rates.
Oil has experienced a volatile start to 2019. It initially climbed due to increased heating demand from the cold Northern Hemisphere winter and US actions against Russia's crude industry. Concerns regarding US President Donald Trump's expanding tariffs weighing on major economies and reducing global petroleum demand later tempered those gains. This week's rally has been fueled by renewed focus on the sanctions.
Adding to the momentum is a spike in European natural gas prices. This makes burning oil more cost-effective, potentially boosting consumption. The premium of the region's diesel price over crude recently reached a three-week high.
Trump has also stated that Israel should suspend its ceasefire agreement with Hamas if hostages are not returned over the weekend. This raised the possibility of renewed hostilities, as both sides have accused the other of violating the agreement's terms.