Oil settles higher as Russia orders output cuts, geopolitical tensions persist

© Reuters. A state controlled oil refinery Lotos is pictured in Gdansk, Poland June 6, 2022. Picture taken June 6, 2022. REUTERS/Kacper Pempel

By Natalie Grover

LONDON (Reuters) – Oil benchmark Brent hovered close to $86 a barrel on Monday as hostilities intensified between Russia and Ukraine and in the Middle East.

Brent crude futures climbed 44 cents to $85.87 a barrel by 1321 GMT while U.S. crude futures gained 46 cents to $81.09.

Both benchmarks have risen steadily this year, with Brent up nearly 11% and WTI about 12.5% by Friday’s close.

The upward trajectory is linked to belief that a sticky recession is being fought off, with interest rates in major economies expected to fall by the summer, while the OPEC+ group of oil producers has extended supply curbs into the second quarter.

Concerns over global oil supply are being heightened, meanwhile, by attacks on Russian energy facilities and Ukrainian energy infrastructure as well as fading hopes of a ceasefire in the Israel-Hamas conflict, said Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities.

Another Russian oil refinery had half of its capacity knocked out in a drone attack over the weekend, sources told Reuters. It is the latest casualty from a string of attacks by Ukraine this month, that altogether has shuttered some 7% of the total refining capacity, Reuters calculations show, on top of maintenance related to other reasons.

Russia attacked Ukrainian generating and transmission facilities last week and over the weekend, causing blackouts in many regions.

In the Middle East, Israeli forces pressed on with their offensive in Gaza on Sunday, with U.S.-backed mediation by Qatar and Egypt having failed to secure agreement between Israel and Hamas on a ceasefire.

Elsewhere, U.S. forces engaged six Houthi unmanned aerial vehicles over the southern Red Sea after the group launched four missiles towards a Chinese-owned oil tanker, U.S. Central Command said on Saturday.

Oil demand forecasts for 2024 have received modest upgrades as post-pandemic economic recovery continues after its inflation-induced dip, but OPEC has retained its supply curbs, said Tamas Varga of oil broker PVM.

This has created a significant buffer that can be used in case of a genuine supply shortage, a key element when arguing against a sustained Brent rally above $90 a barrel, he said.