Oil on Friday slid by the most in three weeks as a stronger US dollar and weak US economic data stoked concerns over an economic rebound.
The US dollar strengthened, reducing the appeal of commodities priced in the currency. US consumer sentiment cooled more than forecast this month 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 COVID-19 pandemic.
Meanwhile, US president-elect Joe Biden said that he would ask the US Congress for US$1.9 trillion to fund immediate relief for the US economy, which 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.
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“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, Missouri.
O’Grady said that oil markets need “driving to go up. If people have money and no place to spend it, it doesn’t make any difference.”
West Texas Intermediate for February delivery fell 2.86 percent to US$52.04 a barrel, down 0.38 percent for the week.
Brent crude for March delivery dropped 2.34 percent to US$55.10 a barrel, down 1.59 percent from a week earlier.
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 that 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 US and global benchmark crude futures traded above 70 this week in a sign that they were overbought, although both slipped under that level on Friday.
A “short-term pullback” is likely in store for “oil prices, given the recent loss of support from a number of key factors,” Rabobank commodities strategist Ryan Fitzmaurice wrote 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 US investment banks.”
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 US$9 billion flow into the oil market.
Since it began on Friday last week, there has 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 past five days have reached a record.
Additional reporting by staff writer
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