Oil rises 2%, extends gains as major producers flag capacity limits

G7 agrees to explore cap on Russian oil price; Macron tells Biden that UAE, Saudi can barely raise oil output; political unrest in Ecuador, Libya could further tighten supply

Oil prices rallied for a third day on Tuesday as major producers Saudi Arabia and the United Arab Emirates looked unlikely to be able to boost output significantly while Western governments agreed to explore ways to cap the price of Russian oil.

Brent crude futures climbed $2.90, or 2.5%, to $116.28 a barrel by 12:33 p.m. EDT (1633 GMT). U.S. West Texas Intermediate (WTI) crude rose $2.35, or 2.1%, to $111.92 a barrel.

Both contracts extended the previous session's gains of nearly 2% after the Group of Seven economic powers vowed to ratchet up existing Western pressure on Russia from sanctions over its invasion of Ukraine.

G7 leaders have agreed to explore imposing a ban on transporting Russian oil that has been sold above a certain price, aiming to deplete Moscow's war chest.

Russian oil export revenue climbed in May even as volumes fell, the International Energy Agency said in its June report.

Western bans on Russia and its oil and gas output have led to a sharp rise in global energy prices, and other major producers have yet to implement a significant boost to supplies.

Saudi Arabia and the UAE have been seen as the only two members of the Organization of the Petroleum Exporting Countries with spare capacity to make up for lost Russian supply and weak output from other member nations.

"A seam of tight supply news bolstered the market. Two major producers, Saudi Arabia and the UAE, are said to be at, or very close to, near-term capacity limits," Commonwealth Bank commodities analyst Tobin Gorey said in a note.

French President Emmanuel Macron told U.S. President Joe Biden on the sidelines of the G7 meeting that the UAE was producing at maximum capacity and Saudi Arabia could increase output by only 150,000 barrels per day, well below its nameplate spare capacity of about 2 million bpd.

Energy Minister Suhail al-Mazrouei said on Monday that the UAE was producing near maximum capacity based on its quota of 3.168 million barrels per day (bpd) under the agreement with OPEC and its allies, a group known as OPEC+.

Analysts also said that political unrest in Ecuador and Libya could tighten supply further.

Meanwhile, U.S. crude inventories was forecast to have fallen for the last two weeks, according to Reuters polls.

The government's weekly petroleum status report that should have been published last week was delayed due to a hardware issue.

The data for both weeks will published together on Wednesday. Those factors underscore market shortages that have led to a rebound this week, countering recession jitters that weighed on prices over the previous two weeks.