Oil prices rise as Russia reinitiates cut to EU supply

Crude oil prices are again under severe pressure and rising rapidly during Asia’s session today. As a result of the Russian decision to cut the Nord Stream 1 gas supply to the EU a second time in less than three weeks, citing the reason was the “technical condition” of one of the operating turbines supplying gas to Europe.

The situation turned after the Russian energy giant Gazprom announced that it would cut gas supplies to the EU because of urgent maintenance work. Hence, they hope to stop another turbine at the Nord Stream 1, reducing the daily gas production to 20% and further halving Europe’s current gas supply level.

According to Gazprom reports, this latest reduction in supply would take effect from Wednesday at 04:00 GMT.

This will create more oil scarcity in Europe, which has hitherto depended on Russian oil for virtually all its economic activities.

Since then, the Ukrainian president, Zelensky, has accused Russia of deliberately fighting an overt gas war against Europe.

Reacting to this new decision by Russia, the German government submitted that there was technically no good reason for Russia to limit gas supply to Europe at this point.

Russia seems to be putting Europe into a very tight situation ahead of winter. This is because limiting gas supply at this point will make it very difficult for the European countries to fill their store of gas before winter sets in. The EU now accuses Russia of using its energy supplies to the country as a weapon against them.

To manage the situation, the European Commission has charged all the European countries to cut their gas usage by at least 15% over the next seven months to avoid increasing demand. European Commission President – Ursula von der Leyen feared that Russia cutting off all energy supplies to the EU might just be cooking up soon and warned all the EU countries to prepare for such a possibility.

Many political analysts suspect Russia might be deliberately playing a game here in Europe. Thus, within the present month, Gazprom has cut its gas supplies running through Europe’s primary natural gas pipeline known as Nord Stream 1 by over 50%. And now seeks to add an extra 20% to it.

To cut the Nord Stream 1 pipeline gas supply to Europe this week is barely one week after Russia stopped their supply earlier this month. The reason was to embark on a 10-days maintenance break. The previous maintenance had not yielded many results, leading them to launch on second maintenance. Many blame Russia for deliberately crumbling the European economy and cutting off its energy supplies to the country when it was most needed. This act hindered their efforts to fill their gas storage ahead of the winter season.

What impact will the recent decision to cut gas supplies to Europe have on oil prices?

The decision to cut the number of gas supplies to Europe through Nord Stream 1 at this critical moment when the winter is imminent places a high demand for oil and gas. When gas usage is much higher due to winter, but with little supply, we expect very high oil prices this winter. Many countries will find it difficult to cope at this point due to renewed inflation, and recession in Europe might become inevitable. The gas cut has not been restricted to Europe alone as other countries such as Poland, Bulgaria, France, and the Netherlands have been affected too.

This means more demand for oil from various countries this time, increasing oil prices even more during the winter.

Oil prices are already rising vigorously due to this news during the Asian session today. WTI jumped from its opening at $95.26 to a new point at $97.56, marking a whooping 230 pips gains made in less than 12 hours.

Similarly, Brent has risen from its opening price at $99.20 to a new high at $101.92, marking a significant 272 pips gains during the Asian session alone.

Analysts predict that the prices will continue pushing higher to create new highs ahead of the winter season. This is because the demand created by this vacuum can hardly be filled quickly, as Europe had hitherto depended on Russia for over 40% of its annual gas supplies.

The next target for WTI is the resistance at $109.2. The target for Brent is the next resistance at $113.5.

Goldman Sachs predicts the oil prices “to hit $140 in the third quarter of 2022 as structural shortages remain unresolved.”

This leading investment bank in the US forecasts oil prices to cap at $135 by the second half of 2022 and then US$125 in 2023.

Despite the bullish sentiment for oil prices, investors must watch out for a shortfall in oil prices tomorrow ahead of the FOMC session, wherein the committee will be expected to hike interest rates. Hiking the interest rate for the dollar often causes the dollar to become bullish, thereby reducing the prices of commodities and every other asset pegged to the US dollar.

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