Crude oil prices hit a six-week high last week supported by a tight US market, amid a slower recovery in the American output and a bigger-than-expected decline in the country's stockpiles.

According to data from the Bureau of Safety and Environmental Enforcement (BSEE), about 0.42 million barrels per day or 23.19 percent of crude production in the Gulf of Mexico remained shut as of September 17. The output is recovering slowly while the refining activity has picked up; this has tightened the US market.

A monthly Energy Information Administration (EIA) report on drilling last week however forecast the US crude output from shale resources to rise next month. The oil rig count also rose for a second week to 411 units -- the highest since April 2020.

US crude stocks plunged to a September 2019 low however production recovered marginally. The EIA report also mentioned a smaller decline in gasoline stocks amid waning demand.

Crude oil also benefitted from an upbeat outlook by the International Energy Agency (IEA), which expects demand growth to pick up in Q4 amid the increasing rollout of vaccines. However, this counters the forecast of the Organization of the Petroleum Exporting Countries as the group of oil producers expects demand growth to slow in the last quarter before rising next year.

However, weighing on price was firmness in the US dollar, concerns about the health of the Chinese economy, persisting coronavirus risks, easing supply concerns relating to Libya and the US, and China’s plan to release stocks from emergency reserves.

The US dollar index rose for a second week as market players positioned themselves for the Fed’s monetary policy meeting, the outcome of which is due later in the day. Concerns about China rose amid disappointing industrial production and retail sales data, and a rise in Covid cases in the Fujian region. Supply concerns relating to Libya eased as protests at the Es Sider and Ras Lanuf terminals ended.

China's National Food and Strategic Reserves Administration will release 7.38 million barrels of crude oil from its state reserves in the first set of auctions it plans to conduct on September 24. The amount is very small compared with China’s consumption, however the country is willing to take measures to limit rising prices in more of a symbolic move.

Crude oil has rose sharply in the last few sessions however the rally seems to have petered out near the $73 per barrel level amid increased volatility in the larger market. We may see some correction in crude oil prices going forward with the return of US production and China's auction of stocks.

-- Ravindra Rao, CMT, EPAT, is VP-Head Commodity Research at Kotak Securities. Views are his own.