Oil retreats from 10-month high as stronger dollar dents rally

Oil declined from a 10-month high as the dollar strengthened, taking the steam out of a recent rally, while investors assessed what impact a potential U.S. stimulus package will have on driving fuel demand higher.

Futures in New York slid 1.6 per cent to trade near $53 a barrel as a stronger dollar reduced the appeal of raw materials like oil that are priced in the currency. President-elect Joe Biden will ask Congress for $1.9 trillion to fund immediate relief for the economy that has been pummeled by the COVID-19 pandemic.

COVID-19 vaccine breakthroughs and a recent pledge by Saudi Arabia to deepen output cuts have driven oil 50 per cent higher since the end of October. Commodities are showing all the signs of a structural bull market, according to Goldman Sachs Group Inc., and OPEC said in its monthly report on Thursday that the group was on track to deplete the world’s bloated crude inventories.

A resurgent virus across some regions, however, may cap further price gains. China is seeing rising cases again after largely containing the outbreak, while in Europe, France is extending tighter curfew measures and Germany is considering strengthening its lockdown.

“A bit of a pullback is just natural,” said Helge Andre Martinsen, senior oil market analyst at DNB Bank ASA. A strong dollar, a decline in equities and Brent’s recent overbought run are spurring to the decline, he said.

Prices

  • West Texas Intermediate for February delivery fell 84 cents to $52.73 a barrel at 10:19 a.m. London time
  • Brent for March settlement lost 1.8 per cent to $55.38

This week has seen the annual commodity index rebalancing take place – a move that was expected to see as much as $9 billion flow into the oil market. Since it began last Friday, there’s been a surge in so called trading-at-settlement volumes, an instrument often used by participants with index exposure. For Brent, average volumes over the last five days have reached a record.

The market’s structure has also softened. Brent’s prompt timespread dipped into contango on Friday, a bearish move where nearby prices are cheaper than later ones. That compares with a healthy backwardation a week ago and indicates renewed concerns over supplies.

© 2021 Bloomberg L.P.

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