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James Hyerczyk
WTI and Brent Crude Oil

U.S. West Texas Intermediate and international-benchmark crude oil futures finished sharply lower on Friday as a stronger U.S. Dollar weighed on foreign demand for the dollar-denominated asset. Weak U.S.  economic data also raised concerns about domestic demand.

Meanwhile, U.S. Drillers continued to add rigs to take advantage of higher prices and OPEC+’s willingness to give up market share. Coronavirus lockdowns in China and U.S. stimulus concerns also pressured prices.

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On Friday, March WTI crude oil futures settled at $52.42, down $1.20 or -2.24% and March Brent futures finished at $55.10, down $1.32 or -2.40%.

US Dollar Rises as Currency Markets Turn Risk-Averse

The U.S. Dollar rose and riskier assets fell on Friday, as President-elect Joe Biden rolled out a $1.9 trillion stimulus plan that was offset by fresh U.S.-China tensions and a rise in COVID-19 infections in China. The move helped the greenback post its biggest weekly gain since November 2020, with its recent recovery from three-year lows challenging the narrative of dollar bearishness for 2021.

A nearly two-month long break in the U.S. Dollar was one of the catalysts behind the huge surge in crude oil prices since late October, so it makes sense that a stronger dollar would be one of the factors encouraging bulls to trim long positions at current price levels.

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Bearish Factors Piling Up

Besides the stronger U.S. Dollar, crude oil bulls were disturbed by weak U.S. economic data that could weigh on future demand. U.S. consumer sentiment came in below expectations in January and other economic data such as sluggish retail sales and producer prices also pointed toward the possibility of weaker demand especially for gasoline.

As the country faces obstacles related to rising coronavirus cases, President-elect Joe Biden said he will ask Congress for $1.9 trillion to fund immediate relief for the U.S. economy that has been devastated by the pandemic. However, traders reacted to this news with trepidation, questioning how easily Democrats will be able to get their proposals through the Senate. The large price tag and inclusion of initiatives opposed by many Republicans set up the relief package for a drawn out battle in the Senate.

US Drillers Add Oil and Gas Rigs for 8th Week in a Row – Baker Hughes

U.S. energy firms last week added oil and natural gas rigs for an eighth week in a row as crude prices recover to their highest in nearly a year.

The oil and gas rig count, an early indicator of future output, rose 13 to 373 in the week to January 15, its highest since May, energy services firm Baker Hughes Co said in its closely followed report on Friday.

Those eight weeks of additions were the most since November when the rig count climbed for nine weeks in a row. Despite gains in recent months, that count was still 423 rigs, or 53%, below this time last year.

U.S. oil rigs rose 12 to 287 this week, their highest since May, while gas rigs gained one to 85, their highest since April, Baker Hughes data showed.

Short-Term Outlook

Technical and fundamental factors could continue to weigh on prices next week, but all we are expecting is a short-term pullback. The size of the break will be determined by the strength of the U.S. Dollar and the extent of the spread of COVID-19 cases in China.

Long-term bulls will likely welcome a sell-off into a value zone since crude oil prices are a little ahead of the fundamentals. Prices are trading at levels not seen in a year, but demand remains well below pre-pandemic levels.

For a look at all of today’s economic events, check out our economic calendar.
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