Oil dropped as the dollar strengthened, adding more volatility to the market which is facing a mixed demand outlook after a recent rally.
Futures in New York slid 0.8% and are set for the biggest weekly loss since December. The demand picture remains uneven across various regions, with Indian fuel sales falling in February amid higher pump prices, while demand is climbing in America and the U.K. A huge U.S. stimulus package lifted broader sentiment, but wasn’t enough to spur further gains in crude as a rising dollar reduced the appeal of commodities priced in the currency.
“The latest rally is starting to feel fragile,” said Vandana Hari, founder of Vanda Insights in Singapore. “Once sentiment from the U.S. stimulus moves into the rearview mirror, we could return to inflation worries and skittish financial markets. That casts a bearish shadow on the oil complex.”
Oil has rallied more than 35% this year as the market tightens due to output cuts from OPEC+ members and as the rollout of vaccines spurs optimism over the demand outlook. Sustained higher prices, however, might encourage a surge in U.S. production by shale drillers in a move that would add to supply concerns amid sharply-rising flows of Iranian crude into China.
The availability of crude cargoes, meanwhile, remains tight due to the OPEC+ curbs. Some oil processors in Asia will get less crude than they asked for next month from Saudi Arabia as the producer extends its unilateral output cuts. Three refiners will receive almost 20% less supply than requested.
The prompt timespread for Brent was 61 cents a barrel in backwardation — a bullish market structure where near-dated prices are more expensive than later-dated ones — compared with 68 cents a week earlier.
OPEC on Thursday sounded a note of caution on the outlook, trimming its forecasts for the amount of crude it will need to pump over the next two quarters. All eyes will be on an International Energy Agency report next week, which will publish forward-looking demand forecasts, while the market will also be watching for clues on the health of the U.S.-China relationship following a high-level meeting set for March 18-19 in Alaska.
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