Oil Retreats as USD Steadies on Low Trading Volumes

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures closest to expiration on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange nudged lower at the start of a new trading week amid a modestly higher U.S. Dollar Index and subdued trading volumes with most of the Asian markets closed for the Lunar New Year as traders continue to monitor the latest developments in the Israel-Gaza conflict.

The Israeli military conducted a series of military strikes in Rafah City overnight as part of a larger operation into southern Gaza after Prime Minister Benjamin Netanyahu dismissed last week a breakthrough in the cease-fire negotiations. More than 1 million Palestinians are currently taking refuge in southern Gaza, which is raising the risk that a military push could disproportionately affect the civilian population there. Hamas, meanwhile, has indicated that a Rafah offensive would mean the end of hostage negotiations. The military escalation once again injected fresh geopolitical risks for crude flows from the Middle East region that accounts for about a third of the world's oil output. The Iran-backed Houthi militia in Yemen overnight launched another attack on a commercial vessel passing through the narrow corridor of Bab al-Mandab in the Red Sea. The Houthis identified the vessel as the Star Iris, with maritime shipping trackers saying the vessel is Marshall Islands-flagged and Greek-owned. The Houthis said the attack is a response to Israel's military actions in Gaza and that they are carried out in sympathy with the Palestinian population. The ongoing attacks on the Bab al-Mandab Strait prompted several companies to halt Red Sea voyages and opt for a longer and more expensive route around Africa.

Meanwhile, Saudi Aramco's CEO Amin Nasser indicated this morning that the company has ample spare capacity of about 3 million barrels per day (bpd) and always stands ready to raise production if required by the markets. Saudi Arabia's cushion of spare capacity in case of major disruptions to global supplies has so far limited the upside for oil prices. Under the production curtailment deal between the Organization of the Petroleum Exporting Countries and Russia-led allies, Saudi oil production is currently averaging about 9 million bpd, down from its 12 million bpd maximum sustainable capacity. The Saudi government on Jan. 30 ordered state oil company Aramco to halt plans of further expansion and maintain a production capacity of 12 million bpd, 1 million bpd below the target announced in 2020.

Monday's move lower in the oil markets comes as trading volumes are subdued across major Asian markets due to the Lunar New Year holidays. Investors' focus this week will be on monthly oil market reports from OPEC and the International Energy Agency for further clues on the global supply and demand disposition.

Near 7:45 a.m. EST, the U.S. Dollar Index firmed 0.05% against a basket of foreign currencies to near 104.050, pressuring front-month West Texas Intermediate March futures to $75.95, down $0.85 barrel (bbl) in overnight trading. International crude benchmark Brent for April delivery dropped back $0.96 to $81.23 bbl. March RBOB futures slipped $0.0033 to near $2.3368 gallon and March ULSD futures declined to $2.9154 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com.

Liubov Georges