Oil prices rally amid gas supply problems

Oil prices rose today to extend year-end gains after a brief cut in Russian natural gas supplies to Europe rattled traders and…

Oil prices rose today to extend year-end gains after a brief cut in Russian natural gas supplies to Europe rattled traders and threatened to drive up demand for oil-based heating fuels.

US February light crude was up 28 cents at $61.32 a barrel early this morning, building on the three-day rally that lifted prices 5 per cent at the end of last year. Oil averaged $56.70 a barrel in 2005, 37 per cent more than the year before.

US heating oil futures were steady at $1.7695 a gallon on today, but London gas oil futures surged 1.8 per cent to $520 a tonne, leading gains on an anticipated pick-up in European demand after the cut in gas exports.

Russian state-controlled producer Gazprom cut natural gas supplies to Ukraine on January 1st after the former Soviet neighbour rejected demands to pay four times more for its gas - a sharp break with subsidised prices rooted in Soviet times.

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Several countries in Europe - which relies on Russia for a quarter of its gas - reported sharp falls in gas deliveries before Moscow began restoring supplies yesterday, bowing to Western pressure to avert an energy crisis.

Russia accused Kiev of illegally tapping off gas from the pipeline crossing its territory to Europe after the feed was cut, but it agreed yesterday to restore flows to close to normal levels.

The underlying dispute remained unresolved, however, raising concerns over Europe's long-term dependence on Russian energy amid a lack of readily available alternatives. Russia is the world's second-biggest crude oil exporter.

Analysts said the disruption to gas supplies may drive up heating oil consumption as colder weather sets into Europe.