Oil Prices Falter Amid Fuel Build

(Bloomberg) -- Oil’s red-hot rally took a breather as a stronger dollar and rising refined products supplies offset shrinking U.S. crude inventories, capping the price under a key technical indicator.

Futures in New York ended a sixth-day winning streak with a 0.6% decline on Wednesday, holding beneath their upper Bollinger band. Crude settled the previous session above the technical indicator, a sign the rally was due for a pullback. While an Energy Information Administration report showed U.S. crude inventories fell by over 3 million barrels last week for a fifth drop in a row, the report also showed builds across gasoline and distillate stockpiles.

Adding further pressure, the Bloomberg Dollar Spot Index strengthened as much as 0.3% on Wednesday, reducing the appeal for commodities priced in the greenback.

“It’s good to see another crude draw” and the remainder of the year should “continue to have drawdowns in overall inventories, especially if OPEC compliance remains pretty strong,” said Brian Kessens, a portfolio manager at Tortoise, a firm that manages roughly $8 billion in energy-related assets. Still, “the refined products side was a little bit disappointing for those people who wanted to be more bullish.”

Prices are gaining some support as cold weather is seen increasing consumption at a time when the supply outlook has already been tightening. Goldman Sachs Group Inc. sees demand getting a boost of at least 1 million barrels a day, while in Japan, power generators have been buying cargoes of low-sulfur fuel oil for the purpose of direct burning, according to traders. Meanwhile, Saudi Arabia trimmed February supplies to at least 11 refiners in Asia and Europe after announcing surprise production curbs last week.

Still, the market faces a precarious demand picture in the near term as the world tries to emerge from the pandemic. U.K. road vehicle use was down 42% on pre-Covid levels last week, while aircraft tracking in early 2021 shows little sign of any meaningful rebound in flight numbers.

“Reimposed public health measures in a number of countries constitute a warning that downside impacts on demand are not entirely behind us,” Michael Hsueh, a strategist at Deutsche Bank AG, said in a note. “However, it is exactly this risk that
Saudi Arabia has seen fit to guard against,” with the announced cuts serving as “an insurance policy against inevitable demand weakness, buying time for global vaccination programs to take effect by the end of the year.”

Prices

• West Texas Intermediate for February delivery lost 30 cents to settle at $52.91 a barrel
• Brent for March settlement fell 52 cents to end the session at $56.06 a barrel
• Both benchmarks’ 14-day Relative Strength Index were above 70, signaling the rally is in overbought territory

A trading executive at Total SE said Wednesday that by the northern hemisphere’s summer, oil-product demand should be back at 2019 levels, excluding jet fuel. Use of aviation fuel is unlikely to recover until the third quarter, Mike Muller, Vitol’s head of Asia, said Wednesday.

“We have a positive outlook,” Russell Hardy, chief executive officer of trading house Vitol Group, said in a Bloomberg Television interview. “The market as usual is racing ahead and factoring in that positive news of a vaccine and the expectation of a better summer and a better second half of 2021.”

Other oil-market news:

• OPEC and its allies are focused on depleting the world’s “stubbornly high” oil inventories, said OPEC Secretary-General Mohammad Barkindo.
• OPEC+ will probably agree to restore more oil output at its March meeting, bringing the group’s production cuts down to about 6.5 million barrels a day in April, Bank of America Corp. said.
• Iran said it would restart production of fuel for its Tehran Research Reactor, a facility that runs on uranium enriched to higher levels in order to produce medical isotopes.
• Analysts at Wall Street’s biggest banks say now’s the time to buy Exxon Mobil Corp. as rallying oil and gas prices increase the chances of the company being able to keep its highly prized dividend, the third-highest in the S&P 500 Index.

--With assistance from Guy Johnson.

© 2021 Bloomberg L.P.