Oil Prices Surge On Supply Disruptions, But Contango Hints At Short-Lived Rally

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Oil prices edged up slightly on Tuesday, extending steep gains from the previous session as production was halted at Norway’s Johan Sverdrup oilfield. Brent prices on the Intercontinental Exchange had rallied more than 3% on Monday due to a softening dollar against a basket of major currencies. coAs the dollar weakens, it makes commodities such as oil attractive for overseas buyers. But, disruptions in production of oil in Norway further boosted sentiments in the oil market late on Monday. “However, for oil, a halt of production at the 755k b/d (755,000 barrels per day) Johan Sverdrup field in Norway due to a power outage, and a drop in production at the Tengiz field in Kazakhstan provided further upside,” Warren Patterson, head of commodities strategy at ING Group, said. At the time of writing, the price of West Texas Intermediate crude oil was at $69.31 per barrel, up 0.2%.Brent crude was 0.3% higher at $73.48 per barrel. 
 Supply disruptions provide temporary upsideNorway’s Equinor said that it had halted production of oil at the Johan Sverdrup oilfield due to an onshore power outage.The oilfield is Western Europe’s largest. Work is underway to restore production, but it was not clear when it would resume, an Equinor spokesperson was quoted as saying by Reuters. Additionally, Kazakhstan’s biggest oilfield, Tengiz, has reduced oil production by 28% to just 30%.The oilfield has halted production because of repairs, which is expected to be completed by Saturday. The oilfield is operated by US energy company Chevron. The disruptions across the world have provided a much needed push to oil prices.Prices had been falling due to concerns over poor demand and a supply glut in 2025. Though these concerns remain, the temporary production halts at major oilfields were pushing prices higher. Patterson said: 

In addition, geopolitical risks between Russia/Ukraine have increased after the US said it would allow Ukraine to carry out long-range missile strikes on Russia.

Russia-Ukraine tensions
Over the weekend, Russia launched a massive air strike on Ukraine, which crippled the latter’s power grid. The attack was one of the biggest in almost three months between the two countries.The escalation was seen by traders as risks to oil supply if Ukraine decided to retaliate by hitting Russia’s oil facilities. Russia remains one of the top oil exporters in the world with the US and Saudi Arabia. Reports also claimed that the US has allowed Ukraine to use US weapons to strike deep into Russia.The Kremlin had warned that it would see this step as a significant escalation. 
 WTI flips to contangoEven as the world grapples with heightened geopolitical tensions and supply disruptions, traders shifted WTI trades to the January contract. The WTI December contract expires on Wednesday. “Despite the strength in the flat price yesterday, the prompt WTI time spread flipped into contango, which points towards a market that looks better supplied,” ING Group’s Patterson said. Contango is a situation when the futures price of a commodity is higher than its spot price. Patterson noted: 

Globally, our balance shows that the market will be in surplus through 2025. 

However, the size of the surplus depends on what OPEC+ decide to do when it comes to output policy for next year.

Therefore, the recent upside in oil prices could very well be temporary as global demand remained sub-standard compared with supply. Next year, supply from countries outside the Organization of the Petroleum Exporting Countries and allies is expected to grow by 1.5 million barrels per day, according to the International Energy Agency. This is expected to offset the projected demand increase of about 1 million barrels per day.On top of this, OPEC is expected to unwind its production cuts, which paints an even more gloomy picture for oil. 
 WTI technical analysisAccording to Fxempire, crude oil prices are showing a bearish trend currently.The fluctuations in the price range between $67-$77 per barrel reflected the uncertainty in the market driven by geopolitical tensions in the Middle East and Russia-Ukraine war, Muhammad Umair, analyst at Fxempire, said in a report. “The trend remains bearish, with the price below 50 and 200 SMAs (simple moving averages),” Umair said. Source: TradingView & Fxempire The strong rebound in prices on Monday was due to the supply disruptions and ongoing conflicts around the globe.  

However, prices remain uncertain in the short term and wait for the next directional move. 

A break below $66 would initiate a downward trend, while a break above $72 would signal a positive outlook for oil prices.

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