Oil rises for a second day on supply concerns

© Reuters. Model of Oil barrels are seen in front of rising stock graph in this illustration, July 24, 2022. REUTERS/Dado Ruvic/Illustration

By Ahmad Ghaddar

LONDON (Reuters) -Oil prices rose on Tuesday for a second day on growing concerns about tightening European supply after Russia, a key energy supplier to the region, cut gas supply through a major pipeline.

Brent crude futures rose $1.25, or 1.2%, to $106.40 a barrel by 1359 GMT, extending the previous day's 1.9% gain.

U.S. West Texas Intermediate (WTI) crude futures were up 98 cents, or 1%, at $97.68 after climbing by 2.1% on Monday.

Russia tightened its gas squeeze on Europe on Monday as Gazprom (MCX:GAZP) said supplies through the Nord Stream 1 pipeline to Germany would drop to only 20% of capacity.

The cut in supplies will leave countries unable to meet their goals to refill natural gas storage ahead of the winter. Germany, Europe's biggest economy, may have to ration gas to industry to keep its citizens warm during the winter months.

"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 at oil brokerage PVM.

The European Union has repeatedly accused Russia of resorting to energy blackmail, while the Kremlin says shortfalls have been caused by maintenance issues and Western sanctions.

EU energy ministers on Tuesday approved a proposal for all EU countries to cut gas use voluntarily by 15% from August to March.

Europe's crude, oil product and gas supplies have been disrupted by a combination of Western sanctions and payment disputes with Russia since the Feb. 24 invasion of Ukraine, which Moscow calls a "special military operation".

Still, falling demand because of recent high crude and fuel prices and the expectation of an increase in interest rates in the United States have pressured prices.

The U.S. central bank is widely expected to raise interest rates by 75 basis points at the conclusion of its policy meeting on Wednesday. That increase could reduce economic activity and curb fuel demand.

Morgan Stanley (NYSE:MS) said that 77% of global central banks have increased rates in the past six months, "making this the most-synchronised cycle of rate hikes since the early 1980s".

The bank lowered its demand growth forecasts for this year and next. It forecasts Brent crude prices at $110 a barrel in the third quarter and WTI at $107.50, each $20 lower than the bank's previous forecasts.

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.

Prompt Brent inter-month spreads reached $5 a barrel on Tuesday, their highest in three weeks. In a backwardated market, front-month prices are higher than those in future months.