Jan 17 (Reuters) - The recent surge in oil prices should encourage producers to increase supply, which may result in sustained decline for crude that undermines the dollar later this year.

Producers would have raised production last year if not for a drop in prices that took Brent to the cusp of critical levels around $70/bbl. Should crude slide below that spot, the rough $70-100/bbl range traded in the wake of the COVID-19 pandemic will very likely slide.

Even with supply restricted by Russia and OPEC, oil slumped last year, and if not for the extension of those restrictions and conflict in the Middle East, it may well have fallen further.

Should oil's leap this month encourage producers to hike soon after the ceasefire between Hamas and Israel, current support for the greenback may quickly unravel.

A move below the 100-MMA at $70.57/bbl would be of major significance for Brent crude oil, initially targeting a move toward $63/bbl. Given crude's slide throughout a period of restricted supply that suggests there may be far more oil than is needed, a drop could be much more extensive.

Should this scenario unfold it will occur when traders are betting in favour of the U.S. currency and when the dollar's rally is stretched. This could result in a significant adjustment of the dollar's uptrend since 2011, for which a 10% dollar drop would be equate to a minor correction, circa 38% of prior gains.

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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)

((jeremy.boulton@thomsonreuters.com))