Oil prices rise on tighter supply outlook, but strong dollar weighs

Saudi Arabia seen raising prices for its crude as part of planned supply cuts

  • Drillers at work in Lagunillas, Ciudad Ojeda, Venezuela. Both foreign exchange and crude movements will be impImage Credit: Reuters
  • An attendant prepares to refuel a car at a petrol station in Rome January 4, 2012. Image Credit: Reuters

Singapore: Oil rose on Wednesday, with top exporter Saudi Arabia expected to increase prices for its crude as part of planned supply cuts, although a strong dollar and moderate economic growth prospects restricted gains.

US West Texas Intermediate (WTI) crude futures were trading at $52.50 per barrel at 0747 GMT (11.47 am in Dubai), up 17 cents from the last settlement.

Brent crude futures (LCOc1) were up 21 cents at $55.68 a barrel.

The gains were due to an expected tightening of physical oil supplies, as major producers like the Organisation of the Petroleum Exporting Countries (OPEC) plan to cut crude output from this month in an effort to end a fuel glut that has dogged markets since 2014.

Reflecting a tightening market, top oil exporter Saudi Arabia is expected to raise the official selling price (OSP) for its crude to Asia in February.

In Indonesia, the retroactive December OSP for its Minas crude was set at $52.62 a barrel, up $8.09 from the previous month, a government document showed on Wednesday.

Indicator

OSPs are a key indicator in determining the prices for crude futures.

"Crude oil has risen... on expectations of reduced supply excess," said Fawad Razaqzada, market analyst at futures brokerage Forex.com.

Futures prices are also reflecting tighter supply fundamentals.

Both Brent and WTI are in a so-called contango shape  since OPEC and other producers like Russia announced cuts, in which crude for delivery within the first half of this year is more expensive than spot contracts.

After that, however, the crude curves show flat to backwardated prices in which future deliveries become cheaper and spot contracts are more expensive, implying that there will be less supply to meet prompt needs.

Crude futures are also being held back by a strong US dollar, which makes it more expensive for countries to import dollar-traded fuel.

Dollar

The dollar hit a 14-year peak this week on the back of improving U.S. economic data.

Both foreign exchange and crude movements will be impacted by the status of the global economy.

Despite encouraging figures in late 2016 and the first days of this year, analysts said that growth prospects were moderate.

"The West ended 2016 on a strong note. The Eurozone picked up steam, the UK is defying gravity and the U.S. is on a roll. Note, however, that this strength isn't fully feeding through into Asia.. China and Japan are expanding, sure, but only at a tepid pace," said Frederic Neumann, co-head of Asia Economics Research at HSBC in Hong Kong.

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