Oil dips below $52 with dollar rising as rally takes a breather

Oil edged lower as the dollar strengthened, with the steam coming out of a rally that pushed crude to the highest level in 10 months.

Futures in New York lost 0.9 per cent as the dollar’s gains reduced the appeal of raw materials such as oil that are priced in the currency. Both West Texas Intermediate and Brent crude are trading in overbought territory, according to the 14-day relative strength index, signaling prices are due for a correction.

Crude rose late Friday after U.S. President-elect Joe Biden proposed trillions of dollars in stimulus to counter the economic toll of the coronavirus pandemic. The rally added to a weekly gain underpinned by Saudi Arabia’s pledge for deeper output cuts. The kingdom also increased its oil prices to Asia, a move followed by Iraq and Abu Dhabi.

Oil has surged about 45 per cent since the end of October after a series of COVID-19 vaccine breakthroughs raised expectations for a sustained rebound in fuel consumption, even though the rollout of shots will probably take some time. The broader commodity market is seeing renewed confidence from investors, with record wagers that oil, crops and metals are set to gain.

“Oil could be next in line” to suffer from a stronger dollar after other commodity prices came under pressure, said Ole Hansen, head of commodities strategy at Saxo Bank A/S. “Having rallied by 40 per cent since the first vaccine announcement in early November, the market has now reached a price level that potentially doesn’t reflect current fundamentals.”

Prices

  • WTI for February dropped 47 cents to $51.77 a barrel at 10:11 a.m. London time
  • Brent for March settlement fell 1.4 per cent to $55.23
  • Both WTI and Brent closed above their upper Bollinger bands on Friday, another technical signal that a rally may be overdone

Saudi Arabia’s pledge last week for a unilateral output cut of 1 million barrels a day eased concerns about oversupply. WTI for February is trading at a premium to March, the first time that’s happened to the nearest contract since May. The structure, known as backwardation, indicates tight supply.

With crude markets starting the year on the front foot, there’s also been an uptick in trading activity. Combined holdings of Brent and WTI futures are at the highest since June, a sign that traders are adding new money to the market.

© 2021 Bloomberg L.P.

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