Oil Falls as Dollar Advances While Crude Supplies Remain Ample

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Oil retreated after the dollar advanced on a report showing U.S. consumer prices rose at a faster pace than expected in April, boosting the case for higher interest rates.

Commodities fell as the dollar’s gain made raw materials priced in the U.S. currency less attractive as a store of value. U.S. crude supplies remain near the highest level in 85 years and 100 million barrels above the five-year average for this time of year. OPEC will continue to favor market share over prices when it meets June 5 because rival producers are starting to buckle, a Bloomberg survey shows.

Oil has rebounded from a six-year low in March amid speculation a cut in the number of U.S. drilling rigs would curb output. Explorers idled just one oil rig this week, a sign that the unprecedented retreat that halted the country’s shale boom is nearing an end. Prices are poised to falter because of a surplus of crude, Goldman Sachs Group Inc. said this week.

“The dollar should continue to strengthen, which will keep pressure on oil through the rest of the year,” Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management, which oversees about $126 billion of assets, said by phone. “The global market is well supplied and there are no signs that demand is picking up significantly.”

West Texas Intermediate for July delivery dropped $1, or 1.7 percent, to settle at $59.72 a barrel on the New York Mercantile Exchange. The volume of all futures traded was 49 percent below the 100-day average at 2:48 p.m. Prices increased 3 cents this week, capping a 10th weekly advance, the longest rising streak since trading started in 1983.

Brent for July settlement slid $1.17, or 1.8 percent, to end the session at $65.37 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude closed at a $5.65 premium to WTI.

Dollar Strength

Federal Reserve Chair Janet Yellen said Friday that she still expects to raise interest rates this year if the economy meets her forecasts.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency versus 10 of its major peers, rose 0.8 percent.

While U.S. companies have reduced the number of rigs drilling for crude by 58 percent since Dec. 1, output remains near the highest level in more than four decades. Rigs targeting oil in the U.S. dropped a 24th week to 659, Baker Hughes Inc. said on its website Friday.

“The drop in the rig count hasn’t being accompanied by a production decline of a similar size,” Haworth said.

U.S. crude stockpiles slipped 2.67 million barrels to 482.2 million last week, according to the Energy Information Administration. Supplies remain near the highest level since 1930, based on monthly records dating back to 1920.

Fed Policy

“I have a much easier time justifying prices at $50 a barrel than here,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.4 billion, said by phone. “The CPI today helps make the case for the Fed to raise rates. If Fed policy starts to tighten the dollar will climb further and oil will come under pressure.”

Saudi Arabia, the biggest member of the Organization of Petroleum Exporting Countries, shaped a strategy of defending market share when it met in November, arguing that the usual response of cutting output to boost prices would not address the threat from shale and other higher-cost suppliers.

All but one of the 34 analysts and traders in a separate Bloomberg survey said OPEC will maintain its daily quota of 30 million barrels when it meets in Vienna.

OPEC’s 12 members pumped about 31.2 million barrels a day of crude in April, almost 3 million a day more than the average amount the world requires from the group this quarter, according to the Paris-based International Energy Agency.

Gasoline, Diesel

“The supply declines aren’t significant enough to change the fundamentals of the market,” Gene McGillian, a senior analyst at Tradition Energy in Stamford, Connecticut, said by phone. “There’s no evidence of any cutbacks in supply outside the U.S.”

Gasoline futures for June delivery decreased 2.85 cents, or 1.4 percent, to close at $2.0539 a gallon in New York. June ultra low sulfur diesel fell 3.34 cents, or 1.7 percent, to settle at $1.9525.

The average price for gasoline at the pump advanced 0.4 cent to $2.735 a gallon Thursday, the highest since Dec. 2, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group. Prices are down from $3.649 a year earlier.

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