UPDATE 5-Oil drops on dollar strength and OPEC+ supply expectations

* Rout in bond markets sends yields soaring

* Market expects increased oil supply

* OPEC+ producers meet on March 4

* Brent and WTI on track for 20% monthly gain (Updates prices)

By Shadia Nasralla

LONDON, Feb 26 (Reuters) – Oil prices fell on Friday as bond price rout led to gains in the U.S. dollar while crude supply is expected to rise in response to prices climbing above pre-pandemic levels.

Brent crude futures for April, which expire on Friday, fell 69 cents, or 1%, to $66.19 a barrel by 1442 GMT. The more actively traded May contract LCOc2 slipped by 80 cents to $65.31.

U.S. West Texas Intermediate (WTI) crude futures dropped $1.00, or 1.5%, to $62.53.

A sell-off in bond markets lifted the U.S. dollar, making dollar-priced oil more expensive for holders of other currencies.

Friday’s gains also reflect profit-taking after both Brent and WTI headed towards monthly gains of about 20% on supply disruptions in the United States and optimism over demand recovery on the back of COVID-19 vaccination programmes.

Investors are betting that next week’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies, a group known as OPEC+, will result in more supply returning to the market.

“Oil prices have gone too far and too fast. Brent is above pre-pandemic levels even though global oil demand is still playing catch-up,” PVM analysts said.

For all the talk of tightening fundamentals, the demand side of the market is nowhere near warranting current oil price leves, they added.

U.S. crude prices also face pressure from the loss of refinery demand after several Gulf Coast facilities were shuttered during the winter storm last week. capacity of about 4 million barrels per day (bpd) is still shut and it could take until March 5 for all shut capacity to resume, though there is risk of delays, analysts at J.P. Morgan said in a note this week.

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