Brent Surges, Drawing Support from Lower Dollar
Crude prices pushed back above the $30 level in Europe trade on Tuesday, drawing support from a broadly low United States dollar. Oil futures contracts which are dollar denominated tend to gain when the dollar plunges, as this makes oil cheaper for buyers in foreign currencies.
The dollar briefly collapsed below the 115 level versus the yen to its lowest level since November 2014 during Asian hours, as sharp plunges in global equity markets boosted demand for safe haven assets.
On the other hand, the dollar index slipped to an intraday low of 96.33, still close from last week’s three month trough, amid rising reluctance over the Federal Reserve’s ability to hike interest rates as much as it would like this year because of sluggish United States growth and chaos in global financial markets.
As stated by an analyst, “Once again we have got a weaker U.S. dollar and I suspect that that’s where the bulk of the support is coming from.”
On the New York Mercantile Exchange, crude oil for March delivery sank 72 cents or 2.44 percent to $30.42 per barrel.
In the previous session, prices plummeted $1.20 or 3.88 percent, to close at $29.69, as hopes of a deal between the Organization of Petroleum Exporting Countries producers and non-OPEC members to slash output continued to fade.
Moreover, Brent crude for April delivery on the Intercontinental Exchange — Futures Exchange in London climbed 45 cents or 1.35 percent to trade at $33.3 per barrel. A day earlier, London traded Brent declined $1.18 or 3.46 percent amid ongoing worries over a global supply glut.
Global crude output is surging faster than demand following a boom in United States shale oil and after the Organization of the Petroleum Exporting Countries opted last year not to slash production in order to defend market share.
Supply glut issues will worsen further as Iranian exports come back to the global oil market.
An analyst noted, “It’s a particularly volatile and difficult time for oil. The market will continue to be in a supply crunch period for the next few months. We have Iran back on, there’s been no significant cut in US production and inventories are high, which means the downside pressure is there.”
Furthermore, Brent’s premium to the West Texas Intermediate crude contract stood at $2.92 compared to a spread of $3.19 by close of trade on Monday.
Industry group American Petroleum Institute on Tuesday publishes its weekly inventory reports followed by official numbers from the United States government’s Energy Information Administration on Wednesday.
According to a market analyst, “The fundamentals haven’t shifted. The market remains in surplus, and while that’s the case, it is very difficult for prices to sustain any gains.”
There is also a little hint of any coordination on production cuts among large producers outside the United States after weekend discussions between the Organization of Petroleum Exporting Countries members Saudi Arabia and Venezuela yielded no concrete result.
An analyst noted, “Hopes of a coordinated supply cut from OPEC and non-OPEC members continue to fade.”
The International Energy Agency reported that the world will keep supply glut for most of 2016 as slumps in United States output take time and the Organization of Petroleum Exporting Countries is unlikely to reduce a deal with other producers to cut surging output.
A commodity analyst noted, “The key issue in the market is the point in time at which supply and demand balance once more, and what we’re seeing here is the IEA are suggesting that will be pushed further into the future.”
“The period where you have to erode the overhang, once markets start to draw (down) is going to be longer, so it feeds into the narrative of a low oil-price environment for longer than they had been anticipating,” the analyst added.
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