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Crude Oil Higher on Geopolitical Tensions, Supply Tightness

Published 01/31/2022, 09:33 AM
Updated 01/31/2022, 09:34 AM
© Reuters.

By Peter Nurse -- Oil prices traded higher Monday, on course for their biggest monthly gain in almost a year, boosted by geopolitical tensions in Eastern Europe and the Middle East as well as continued supply shortages. 

By 9:35 AM ET (1435 GMT), U.S. crude futures traded 0.6% higher at $87.33 a barrel, while the Brent contract rose 0.6% to $89.06. Both benchmarks recorded their highest levels since October 2014 on Friday, and are heading for gains of around 15% this month, the most since February 2021. 

U.S. Gasoline RBOB Futures were up 1.1% at $2.5655 a gallon.

The U.N. Security Council is set to meet Monday to discuss Russia's troop build-up on the border with Ukraine, but with Russia one of the countries on the council that holds a veto there will be no action.

Russia and the West have been in dispute over Moscow’s intentions for Ukraine for a number of weeks, a fact that is boosting the crude market given Russia could disrupt its natural gas supplies to Europe should the situation turn violent and the West levies sanctions.

Adding to general supply risk premia, the United Arab Emirates said it had intercepted a ballistic missile fired by Yemen's Houthi as the Gulf state hosted Israel's President Isaac Herzog in a first such visit.

This positive tone is likely to continue ahead of Wednesday’s meeting of the Organization of the Petroleum Exporting Countries and allies led by Russia, a group known as OPEC+, to discuss future output levels.

The group is expected to stick with its strategy of a cautious increase of 400,000  barrels a day in output quotas per month, a stance it has taken since August last year, even as a number of members have struggled to fulfil their quotas. This has resulted in tight inventories given the strong post-pandemic recovery.

Additionally, weekly data from Baker Hughes showed that U.S. drillers have continued to add oil rigs at a cautious pace, despite the supply tightness and higher prices increasing economic incentives to support production. 

The U.S. added four oil rigs over the last week, while another two rigs were added for gas exploration, taking the total rig count (oil & gas combined) to 610 for the week ended Jan. 28. “still significantly below pre-Covid levels of around 683, even as NYMEX WTI trades comfortably above pre-Covid price levels,” ING said, in a note.


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