Crude oil futures extend gains after $2/b jump overnight as supply remains tight

Crude oil futures were higher in mid-morning Asian trade July 26, extending strong overnight gains, as a still tight physical supply picture gained the upper hand over recession fears for the moment.

At 10:07 am Singapore time (0207 GMT), the ICE September Brent futures contract was up $1.07/b (1.02%) from the previous close at $106.22/b, while the NYMEX September light sweet crude contract was 78 cents/b (0.81%) higher at $97.48/b.

Oil prices endured a volatile ride in the previous session July 25 as persistent recession fears tussled with a still tight physical market, as evidenced by a wide backwardation in prompt time spreads.

The front-month ICE Brent crude contract had fallen by more than 1% in the July 25 Asian session before reversing losses and finishing the day sharply higher by around 2%.

"This week is all about geopolitics and the Fed for oil prices and that means oil might struggle to make fresh lows," OANDA senior market analyst Edward Moya said in a July 26 note.

The prompt M1-M2 time spread for ICE Brent crude was trading at $5.06/b at 0207 GMT, a high not seen since June 30 when it settled at $5.78/b, though prompt spreads are typically more volatile toward the end of the month.

Attention remained focused on the US Federal Reserve's open market committee meeting kicking off July 26, where the Fed is expected to raise interest rates by 75 basis points. A statement announcing the Fed's decision is expected to emerge July 27.

Europe remained caught in a severe gas shortage crisis as Russia is set to further reduce gas flows to the region starting July 27, with Russian gas producer Gazprom July 25 citing maintenance on a turbine as the reason.

"The latest incident raises the uncertainty around future gas flows into Europe," said ANZ Research analysts Brian Martin and Daniel Hynes in a note. "European Union members are meeting this week to discuss the energy crisis, with plans to reduce flows to certain consumers on the table."

Martin and Hynes added that Russian oil exports to buyers have declined for five consecutive weeks, citing ship tracking data by Bloomberg. "Shipments to China and India were down between 10% and 40% from the recent peak," they added.

The shortage of crudes, as well as skyrocketing middle distillate margins in June and early July, saw traded differentials for certain Southeast Asian crude grades soar to record premiums of over $20/b to their benchmarks for September-loading cargoes.

Sources said one of the cargoes had been bought for power generation purposes in Japan due to high coal and LNG prices.

Dubai crude swaps were higher in mid-morning trade in Asia July 26 from the previous close, though intermonth spreads were lower.

The September Dubai swap was pegged at $95.25/b at 10 am Singapore time (0200 GMT), up $3.54/b (3.86%) from the July 25 Asian market close.

The August-September Dubai swap intermonth spread was pegged at $3.63/b at 10 am, down 1 cent/b over the same period, and the September-October intermonth spread was pegged at $2.63/b, down 10 cents/b.

The September Brent/Dubai EFS was pegged at $10.90/b, up 13 cents/b.