(Bloomberg) — Oil dropped in tandem with a strengthening dollar as prices struggled to break past recent highs.
Futures fell as much as 2.3% in New York, while global benchmark Brent futures also fell after briefly topping $70 a barrel on Monday. The Bloomberg Dollar Spot Index gained as much as 0.3%, reducing the appeal of commodities priced in the currency.
West Texas Intermediate crude’s nearest timespread flipped into a bearish contango structure, signaling oversupply. U.S. stockpiles have grown in recent weeks as domestic oil output outpaced the recovery in refineries following last month’s deep freeze. At the same time, there are some concerns that the outlook for rising U.S. shale production may complicate the OPEC+ alliance’s efforts to rebalance the market.
“We’ve had such a big runup in the past couple weeks, some pullback has to be expected,” said Michael Lynch, president of Strategic Energy & Economic Research. Meanwhile, “at these price levels, the Permian was expanding almost 1 million barrels a day per year before the pandemic, and OPEC+ won’t want to go back to that until there’s certainly much stronger demand growth.”
Crude has rallied this year, aided by Covid-19 vaccines and OPEC+ continuing to keep a tight rein on supply. Citigroup Inc. raised its full-year forecast for Brent and is predicting it may even hit $80 a barrel in the next few months. Still, signs of demand recovering have been mixed around the world, and some investors remain cautious.
“The behaviour today, when no market moving news has emerged, could indicate that oil above $70 is now viewed as a take-profit area,” said Ole Hansen, head of commodities strategy at Saxo Bank.
In China, industrial output surged in the first two months of the year, underscoring the strength of its V-shaped rebound and reinforcing expectations for increased energy demand.
China processed more than 14 million barrels a day of crude in January and February, and refiners have kept consumption above that level every month since June. There are also bullish demand signs elsewhere, with U.S. air passenger numbers hitting a 12-month high on Friday, while road use is creeping up in parts of Europe.
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