OIL FUTURES: Crude falls as dollar rallies, OPEC+ spare capacity looms

New York — Crude futures fell in morning trading in Europe on Feb. 26, on a strong rebound in the US dollar and concerns over the expected supply increases to come from OPEC+.

At 1148 GMT, April ICE Brent crude futures were down 89 cents/b at $65.99/b, while the NYMEX April light sweet crude futures contract was $1.11/b lower at $62.42/b.

The US dollar index was 0.66% higher on the day at 90.73 at 1148 GMT, reaching its highest level in over a week. Rising US bond yields as investors priced in expected higher inflation as a result of government stimulus and a quick economic recovery were driving the dollar higher. A stronger dollar makes oil more expensive for buyers using other currencies.

Expectations of an announcement of supply increases from OPEC+ at its next meeting on March 4 and concerns over the scale of spare Saudi capacity were also dragging on oil prices.

"A return to the originally planned phase 3 would mean an increase in supply of 2.25 million b/d versus March levels," HSBC's Global Head of Oil and Gas Equity Research, Gordan Gray, said. "Market fundamentals could probably just about absorb such an amount in Q2 -- if demand recovers enough -- but an announcement of an immediate increase on this scale would risk spooking the market badly. The most likely outcome is a staged move to phase 3 supply levels -- probably a 0.5 million b/d increase at most in April."

"A conservative agreement should support prices in the short term but there's still much more spare capacity in OPEC+ than there is likely demand growth," Gray said. "Global demand could conceivably be 5-6 million b/d higher in H2 2021 than in Q1, but this must be seen against around 8 million b/d of OPEC+ supply curbs still in place."

However, BCS Global Market's Senior Oil and Gas Analyst Ron Smith said "If [OPEC+] undershoot a bit on their restarts, oil prices could easily take off to and move through $70/b."

"That being said, a continuation of the current six additional rigs per week in the US will at some point result in rising production," Smith added. "When that happens, if not before, I expect OPEC+ to move to take back market share before the American shale players can."

Russian exports via ports in February rose 6% month on month to 2.1 million b/d, Russian pipeline operator Transneft said Feb. 26. This was still down 14.3% from February 2020.