COVID-19 will be the big story for the oil outlook in 2021: Jason Schenker
Oil fell 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 1 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.
With crude starting the year strongly, Goldman Sachs Group Inc. said it expects Brent to reach US$65 a barrel by the summer, sooner than previously anticipated. Last week, Saudi Arabia pledged deeper output cuts, a move that Goldman said will bring forward market tightness. The kingdom also increased its oil prices to Asia, and was followed by Iraq, Abu Dhabi and Kuwait.
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.
“The market has now reached a price level that potentially doesn’t reflect current fundamentals,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S. “Oil could be next in line” to suffer from a stronger dollar after other commodity prices came under pressure.
- WTI for February dropped 53 cents to US$51.71 a barrel at 8:40 a.m. in New York
- Brent for March settlement fell 1.5 per cent to US$55.16
- 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 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.
Other oil-market news:
- Russia raised its crude and condensate production in early January after OPEC+ agreed to a gradual ramp-up.
- Crude flows from Kazakhstan were halted due to severe frost in the north of the country. Two Kazakh regions remained without power supply, including the pumping station that delivers oil to Russia’s pipeline system.
- Saudi Crown Prince Mohammed bin Salman unveiled his latest vision for the country’s future beyond oil: a city with no cars, roads or carbon emissions.
- India’s petroleum consumption fell for the first time in more than two decades in 2020 as the pandemic shuttered businesses and factories, hurting demand from one of the world’s largest users.