Oil Gains Capped by Dollar Strength and OPEC+ Supply Expectations

By the Al Attiyah Foundation

By the Al Attiyah Foundation

Oil prices fell slightly on Friday as the U.S. dollar rose, with forecasts calling for crude supply to rise in response to prices climbing above pre-pandemic levels. On Friday, U.S. West Texas Intermediate (WTI) crude futures settled at $61.50 per barrel, while Brent crude futures for April, which expired on Friday, settled at $66.13 a barrel. Friday’s drop in prices was attributed to a strengthening dollar, which rose as U.S. government bond yields held near one-year highs. Resulting in greenback-priced oil becoming more expensive for holders of other currencies. 

Brent rose 5% and WTI ended up 3.8% on the week, with both 20% higher in the month, due to supply disruptions in the United States and optimism over demand recovery on the back of COVID-19 vaccination programs. In addition, last week’s U.S. stockpile report showed a surprise build in oil inventories, after a deep freeze disrupted production the previous week. U.S. crude production also fell in December, the latest month for which data is available, according to a monthly report from the Energy Information Administration.

Despite talk of tightening fundamentals, the demand side of the market is nowhere near warranting current oil price levels, some analysts said. Subsequently, investors are betting that next week's meeting of (OPEC) and its allies, a group is known as OPEC+, will result in more supply returning to the market. 

U.S. crude prices also face pressure from slower refinery demand after several Gulf Coast facilities were shuttered during the winter storm last week. The refining capacity of about 4 million bpd remains shut and it could remain so until March, J.P. Morgan said in a note last week.

Global Gas Prices Fall on Milder Weather and Lower Heating Demand

Asian LNG prices fell last week, with less demand for heating in the region and on expectations that exports out of the United States will normalize after the Texas storm. The average LNG price for April delivery into Northeast Asia was estimated at about $5.60 per million British thermal units (mmBtu), down about 80 cents from the previous week, industry sources said. Weather data from Refinitiv Eikon has shown that temperatures in Tokyo, Shanghai, and Seoul are expected to be higher than average over the next two weeks, effectively reducing heating demand.

While the worst has seemed to have passed after a deep freeze in Texas shut wells and pipelines this month, the industry will still need time to recover, said Kpler consultancy firm. Two dozen vessels remain on the U.S. Gulf Coast waiting to load LNG, compared with no more than four or five under normal weather conditions. Buyers of LNG from the United States are expected to cancel no more than five cargoes for loading in April, trade sources said.

Cheniere Energy, the top U.S. LNG producer, raised its full-year adjusted earnings forecast on Wednesday, predicting higher demand for the fuel as COVID-19 vaccinations boost economic recovery. Lockdown measures implemented to curb the pandemic slashed demand for energy and hurt prices for natural gas in 2020. But with economic recovery in Asia, particularly in China, fuel sales have increased. The firm said China has become the world's largest consumer, ahead of Japan, and is set to continue to drive up demand. Royal Dutch Shell also predicts Global demand to almost double by 2040, in its annual LNG market outlook. 

In the U.S. natural gas futures eased to a four-week low on Friday, based on forecasts for milder weather through mid-March, allowing more production to return from last week's freeze, and heating demand to decline. Front-month gas futures fell 0.2%, to settle at $2.77 per million British thermal units on Friday. For the week, the contract was down almost 10% after rising around 5% the previous week. For the month, however, it was still over 7% after gaining 1% in January.

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DISCLAIMER: The views expressed in this insight piece are those of the author and do not necessarily reflect the official policy or position of IndraStra Global.