Oil futures finished lower on Tuesday, with U.S. benchmark prices logging their lowest settlement in a week and Brent crude prices at their weakest level of the month as the dollar rallied and analysts warned of near-term headwinds for the commodity.
July crude slid $1.69, or 2.8%, to settle at $58.03 a barrel on the New York Mercantile Exchange. Prices haven’t settled at a level this low since May 19. July Brent crude on London’s ICE Futures exchange also fell $1.80, or 2.8%, to $63.72 a barrel. That was the lowest settlement this month for a most-active Brent contract.
Strength in the dollar “is not a joyful news for oil traders,” said Naeem Aslam, chief market analyst at AvaTrade. “You can argue that the commodity has formed a strong bottom for now, but it is still difficult to sleep at night for traders who are holding long positions in [West Texas Intermediate] crude or Brent,” he said. The dollar surged across rival currencies and rose to its highest level against the yen since July 2007 after data showed an up tick in U.S. business sentiment. Worries about a Greek default also pushed the euro lower. A stronger dollar often pressures dollar-denominated commodity prices, including those for oil. “Oil will need to overcome a growing list of near-term headwinds to continue its recovery. In contrast to the past 2 months, renewed U.S. dollar appreciation weighed on oil last week,” Morgan Stanley analysts said, adding that the market is also being pressured by several other factors.
These include neutral-to-bullish speculative positioning, growing supply from the Organization of the Petroleum Exporting Countries as Saudi and Iraqi production touch record levels, under appreciated risk of Iranian supply, and some signs of stress in physical markets.
Investors are awaiting the OPEC meeting on June 5 in Vienna and any indications of a supply response from Saudi Arabia and other key oil producers. This OPEC meeting is likely to be particularly contentious given the likelihood that high-cost OPEC producers will seek a cohesive call for higher oil prices to cover fiscal costs, economist Barnabas Gan at Singapore’s OCBC Bank said. “However, we continue to expect OPEC to remain steadfast to their call for maintaining the production quota at its current 30 million barrels a day,” Gan said. He said OPEC’s tone will have a fundamental impact on crude oil prices for the rest of the year, and any surprise quota reduction will see a sharp knee-jerk reaction in oil prices.