U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Friday as a steep rise in Treasury yields drove the U.S. Dollar higher, making dollar-denominated oil less attractive to foreign buyers. Meanwhile, traders are starting to seriously consider the possibility of a rise in crude supply in response to the move in prices back above pre-pandemic levels.
Jump in Treasury Yields Lift US Dollar
A sharp rise in U.S. Treasury yields sunk bond markets while making the U.S. Dollar a more attractive asset. The rise in the greenback helped push down demand for dollar-denominated crude oil because it made the commodity more expensive for foreign buyers.
Prices Retreat on Supply Fears as OPEC+ Prepares to Meet
Traders are trimming long positions on concerns that next week’s OPEC+ meeting will result in more supply returning to the market.
“The originally planned (easing of cuts) would mean an increase in supply of 2.25 million bpd versus March levels,” HSBC said in a note.
“We think market fundamentals could probably just about absorb such an amount in Q2 – if demand recovers enough – but an announcement of an immediate increase on this scale would risk spooking the market badly.”
Pressure from Loss of Refinery Demand
U.S. crude oil prices also face pressure from the loss of refinery demand after several Gulf Coast facilities were shuttered during the winter storm last week.
Refining capacity of about 4 million barrels per day (bpd) is still shut and it could take until March 5 for all shut capacity to resume, though there is risk of delays, analysts at J.P. Morgan said in a note this week.
Prices are currently trading above pre-pandemic levels, but demand is still below its pre-pandemic levels. This tells me that the market is too far ahead of the fundamentals. Furthermore, OPEC and its allies see this move as a good reason to trim its on-going production cuts. These are two good reasons why we expect to see a near-term correction.
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This article was originally posted on FX Empire