Oil Slumps on Dollar Strength and Cooling Consumer Sentiment
Oil pumping jacks in an oil field at sunset in Russia. (Photographer: Andrey Rudakov/Bloomberg)

Oil Slumps on Dollar Strength and Cooling Consumer Sentiment

Oil slid by the most in three weeks as a stronger dollar and weak U.S. economic data stoked concerns over an economic rebound.

Futures in New York tumbled 2.3% on Friday after a rally in oil earlier in the week pushed the benchmark into overbought territory. The U.S. dollar strengthened, reducing the appeal of commodities priced in the currency. U.S. consumer sentiment cooled more than forecast in January and other economic data such as sluggish retail sales and producer prices also portray the obstacles still facing the country as it emerges from the pandemic.

Meanwhile, President-elect Joe Biden said he will ask Congress for $1.9 trillion to fund immediate relief for the U.S. economy that has been pummeled by the pandemic. But the large price tag and inclusion of initiatives opposed by many Republicans set up the aid package for a drawn out legislative battle.

“We’ve had a lot of strength in a number of different markets and now we’re getting a pullback,” said Bill O’Grady, executive vice president at Confluence Investment Management in St. Louis. Ultimately, oil markets need “driving to go up. If people have money and no place to spend it, it doesn’t make any difference.”

Oil Slumps on Dollar Strength and Cooling Consumer Sentiment

Despite the pullback in oil futures, vaccine breakthroughs and Saudi Arabia’s pledge earlier this month to deepen output cuts are expected to support prices. JPMorgan Chase & Co. said a “nasty deficit” could emerge in the oil market later this year.

Meanwhile, technical indicators had been flashing warnings signs all week. The 14-day Relative Strength Index for both U.S. and global benchmark crude futures traded above 70 this week in a sign they were overbought, though both slipped under that level Friday.

A “short-term pullback” is likely in store for “oil prices, given the recent loss of support from a number of key factors,” Ryan Fitzmaurice, commodities strategist at Rabobank, said in a note. “With that said, the dips may be shallow as investor appetite for commodities appears to be increasing rapidly following the recent bullish oil calls and talk of a commodity super-cycle from some of the larger and more prominent U.S. investment banks.”

See also: Goldman’s Currie Says Commodities Show Signs of a Bull Market

Prices
  • West Texas Intermediate for February delivery fell $1.21 to settle at $52.36 a barrel. Futures rose less than 1% this week
  • Brent for March settlement lost $1.32 to end the session at $55.10 a barrel. The contract fell 1.6% during the week

The market’s structure has also softened. Brent’s prompt timespread dipped back into contango on Friday, a bearish structure where nearby prices are cheaper than later-dated ones.

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.

Other oil-market news:
  • Crude exports from Saudi Arabia so far in January have dropped below levels observed in December, tanker-tracking data compiled by Bloomberg show. A surge in flows to India hasn’t been enough to offset the decline to other major buyers.
  • Total SE became the first oil major to quit the influential American Petroleum Institute due to a clash on climate change policy, a sign of the pressure the U.S. lobby group is likely to come under as Washington is about to again embrace the Paris climate agreement.
  • The Securities and Exchange Commission has been largely silent on the financial wreckage of the U.S. shale industry in recent years, but that may be about to change.

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