Oil jittery as market weighs OPEC filling Russia supply gap

Industrial facilities of PCK Raffinerie oil refinery are pictured in Schwedt/Oder, Germany, March 8, 2022. [Reuters]

Oil prices rose on Thursday in volatile trade following a sharp drop in the previous session as the market contemplated whether major producers would boost supply to help plug the gap in output from Russia due to sanctions for its invasion of Ukraine.

Brent crude futures were up $2.53, or 2.28%, at $113.67 a barrel at 0651 GMT after trading in about a $5 range. The benchmark contract slumped 13% in the previous session in its biggest one-day drop in nearly two years.

U.S. West Texas Intermediate (WTI) crude futures were up $1.64, or 1.51%, at $110.34 a barrel, after trading in a $4 range. The contract had tumbled 12.5% in the previous session in the biggest daily decline since November.

Uncertainty over where and when supply will come from to replace crude from the world's second-largest exporter Russia in a tight market has led to wide-ranging forecasts for oil prices between $100 and $200 a barrel.

"So to suggest the oil market is confused would be an understatement as we are in an unprecedented situation," said Stephen Innes, managing partner at SPI Asset Management.

Comments from the United Arab Emirates energy minister and the country's ambassador to Washington sent conflicting signals.

UAE Energy Minister Suhail al-Mazrouei said on Twitter late on Wednesday his country is committed to the existing agreement by the Organization of the Petroleum Exporting Countries and allies including Russia, together called OPEC+, to ramp up oil supply by 400,000 barrels per day monthly following sharp cuts in 2020.

Just hours before, prices slumped on comments from UAE's ambassador to Washington saying his country will be encouraging OPEC to consider higher output to fill the supply gap due to sanctions on Russia after it invaded Ukraine. Russia calls its incursion a "special operation" to disarm its neighbour.

The comments from UAE officials came as the market also took into account moves by the United States to ease sanctions on Venezuelan oil and efforts to seal a nuclear deal with Tehran, which could lead to more oil supply coming from Iran later this year.

Talks set for Thursday between Russia and Ukraine's foreign ministers in Turkey also gave the market reason for pause.

While UAE and Saudi Arabia have spare capacity, some other OPEC+ producers are struggling to meet their output targets due to underinvestment in infrastructure over the past few years, which will limit their ability to lift output further.

"We think it will be challenging for OPEC+ to boost production in this environment," Commonwealth Bank commodities analyst Vivek Dhar said.

Meanwhile, U.S. crude oil, fuel stockpiles fell last week, adding to the worries over already tight global supplies.

Crude inventories fell by 1.9 million barrels in the week to March 4 to 411.6 million barrels, compared with analysts' expectations in a Reuters poll for a 657,000-barrel drop.

U.S. crude stocks in the Strategic Petroleum Reserve fell to 577.5 million barrels, the lowest since July 2002.