DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied more than 5% on Monday, sending both U.S. and world crude benchmarks back above $100 per barrel (bbl) after Russia's state-owned giant Gazprom declared force majeure on some gas deliveries to European customers further squeezing EU energy markets, while a weaker U.S. dollar tied to repricing of the size of the Federal Reserve's next rate hike also helped put wider commodity markets on firmer footing.

Gazprom's export unit on Monday declared force majeure on several European natural gas buyers citing "past and current shortfalls in gas deliveries," according to German utility Uniper.

"We consider this unjustified and have formally rejected the force majeure claim," said Uniper in a statement released Monday.

Second German utility RWE confirmed today that it received a similar notice but declined to comment on details or the company's legal position.

The move likely signals Gazprom intends to restrain gas flows to European buyers to limit their ability to refill storage ahead of the fall-winter heating season, reinforcing Russia's grip on the region's energy. Russia accounts for one-third of European gas supplies, with Germany and Italy being particularly vulnerable to a cutoff in gas flows.

In the immediate aftermath of the announcement, International Energy Agency issued an urgent warning that Europe must cut gas consumption immediately. Economists estimate that Europe's economic growth could be reduced by 1% this winter as a result of the Russian gas cutoff. In the worst-case scenario, the European Union estimates that Russia's gas suspension would reduce gross domestic product by 1.5%. Previously, International Monetary Fund estimated Europe's GDP would average 1.6% this year, down from 5.9% seen over the course of 2021.

Earlier in the session, oil complex was boosted by reports Saudi Arabia is not prepared to raise oil production following U.S. President Joe Biden's first visit to the Middle East as president in a bid, in part, to secure a pledge from Gulf producers for higher output.

"The decision to increase oil production is within OPEC+ and should follow the policies of keeping the markets balanced not a particular agreement," said Saudi State Minister of Foreign Affairs Adel Al-Jubeir on Saturday (July 16).

U.S. officials have confirmed that they do not expect Saudi Arabia to immediately boost output and now await the outcome of OPEC+ meeting on Aug. 3, which will include Russia. Riyadh made it clear the kingdom was sticking with the alliance.

OPEC+ spare capacity remains low, according to analysts, with most producers currently pumping at their maximum rate. It's unclear how much extra oil production Saudi Arabia could bring to the market in the short term.

At its last meeting on June 30, OPEC+ greenlighted an increase in its output target of 648,000 barrels per day (bpd) for August, ending record production cuts agreed to in April 2020 at the height of the pandemic to counter collapsing demand. The alliance gave no indication on what their next step in production policy would be.

In currency markets, U.S. dollar index dropped more than 0.68% on Monday against a basket of foreign currencies to settle at 107.231, easing pressure on commodities traded in the U.S. currency. Dollar weakness follows market repricing of how aggressive the Federal Open Market Committee will be in lifting the targeted rate for federal funds when they meet July 26-27, with 71.5% of investors now expecting a 75-basis point hike compared with 28.5% that anticipate a 100-basis point increase, according to CME's FedWatch Tool.

At settlement, West Texas Intermediate August contract rallied $5.01 to $102.60 bbl. Brent crude futures for September delivery climbed above $106 bbl, up more than $5 bbl. NYMEX August RBOB futures advanced 5.11 cents to $3.2643 gallon, while front-month ULSD declined 4.35 cents to $3.6555 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com