Oil Heads for Weekly Slump as Taper Signal Punishes Commodities

(Bloomberg) — Oil headed for a substantial weekly loss, hurt by the Federal Reserve’s move toward tapering asset purchases, a rally in the U.S. dollar, and concerns about global energy demand.

West Texas Intermediate has tumbled more than 6% this week, and closed at the lowest since May on Thursday amid a broad retreat across commodities. The U.S. oil benchmark was 0.6% higher near $64 a barrel on Friday.

Oil has been buffeted this month by the prospect of the Fed cutting back on its extraordinary monetary stimulus despite the spread of the delta coronavirus variant. The pandemic remains a threat to energy demand, especially across Asia, with key importer China restricting mobility to combat an outbreak.

Crude’s bout of weakness, which follows a powerful rally in the first half, may prompt OPEC+ to pause its next planned production increase, according to Citigroup Inc. The 23-nation group led by Saudi Arabia and Russia is scheduled to meet to assess the state of the market on Sept. 1. At present, members are due to add another 400,000 barrels a day of supply next month.

This was a risk-off week, marked by concerns around the delta variant, mixed activity numbers from China, a stronger dollar, and the fear that the U.S. central bank could taper quickly, according to Wayne Gordon, a strategist at UBS AG Wealth Management. “Downside is limited from current levels,” he said.

The dollar hit the highest level since November following the Fed’s move. That makes commodities including crude more expensive for overseas buyers. Oil’s drop this week was matched by retreats in copper and other raw materials.

The pandemic continues to disrupt plans to restart economic activity, crimping mobility and demand for fuels. In Australia, Sydney’s two-month long lockdown will be extended until at least the end of September. In the U.S., more companies announced plans to keep workers at home as delta spreads.

Brent’s prompt timespread firmed this week, even as headline prices fell. It was 47 cents a barrel in backwardation on Friday, from 37 cents on Monday. That’s a bullish pattern, with near-dated prices above later-dated ones.

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