Oil down 7% on week as dollar rockets on U.S. jobs report

By Barani Krishnan

Investing.com - Good U.S. jobs data used to translate almost instantly to higher oil prices. Not anymore. 

Crude prices tumbled 7% on the week, taking global benchmark Brent to below $80 per barrel while bringing WTI, or the U.S. West Texas Intermediate, to the low $70s after a sterling U.S. jobs report for January bumped up the dollar instead, weighing on commodities.

Some 517,000 jobs were added last month, the Labor Department’s NFP, or nonfarm payrolls, report said. That was almost three times above the forecast growth of 188,000 and against December’s revised NFP number of 260,000. The outperformance threw a fresh challenge to the Federal Reserve, which had been hoping its aggressive rate hikes over the past year would have sufficiently cooled the labor market and wages to get inflation back to its target.

New York-traded West Texas Intermediate, or WTI, crude for March settled down $2.49, or 3.2%, at $73.39 a barrel as the dollar’s resurgence on the same jobs report put paid to crude’s initial advance on the data. 

By midmorning, oil capsized in a sea of red with gold and other raw materials as the dollar’s rebound from 10-month lows made commodities priced in the U.S. currency costlier for non-dollar holders.

For the week, the U.S. crude benchmark was down by just over 7.5%, opening a fresh gash on oil market sentiment for February, after the drop of nearly 3% in the final week of January. Month-to-date, WTI was down about 7%, extending its near 9% slide over three previous months.

London-traded Brent crude for March delivery settled down $2.23, or 2.7%, at $79.94 a barrel, after a three-week low at $79.89.  For the week, the global crude benchmark was down about 7.5%, after last week’s near 3% loss. For February thus far, Brent has lost 5.4%, extending its compounded 6.5% slide for January and December.

“Sentiment in this market is fickle,” said Craig Erlam, analyst at online trading platform OANDA. “It clearly doesn't take too much, as we saw in early January, for investors to become euphoric, nor does it take much for them to lose their nerve. That could remain a key feature of the first quarter and ensure oil prices remain highly volatile.”

The Dollar Index and yields on the U.S. 10-year Treasury note, which act as contra trades against risk assets that include stocks and commodities, surged and could continue rising if the Fed rethinks its plan about further consolidating rate hikes this year. The central bank went from a 50-basis point rate hike in December to 25-basis points in February.

As though sensing a tougher challenge for this year, Fed Chair Jerome Powell told a news conference on Wednesday that while the pace of job gains had slowed late last year, “the labor market continues to be out of balance”. 

The Fed has increased rates by 450 basis points in a monetary tightening cycle that began in March 2022, two years after the coronavirus outbreak, which led to trillions of dollars in relief spending that pumped up the economy and triggered runaway inflation.

Inflation, as measured by the CPI, or Consumer Price Index, hit four-decade highs in June when it expanded at 9.1% yearly. In December, the CPI grew at 6.5% per annum, its slowest since October 2021. Yet, that was more than three times the Fed’s target of 2% per annum.

Oil prices have been on the back foot since a sixth straight weekly build in U.S. crude, along with surpluses in fuel, reported by the EIA, or Energy Information Administration, this week.

U.S. crude inventories, meanwhile, rose by 4.14 million barrels during the week ended Jan. 27, the EIA said in its Weekly Petroleum Status Report. The build was above the 0.376M forecast by industry analysts and compared with the rise of 0.533M reported by the EIA during the previous week to Jan 20.

For context, the EIA has reported a total crude build of 34.5M barrels over the past six weeks. At current standing, crude stockpiles are at the highest since June 2021, said the EIA, the statistical arm of the U.S. Energy Department.

On the gasoline inventory front, the EIA cited a build of 2.576M barrels, versus the forecast of 1.442M and the previous week’s rise of 1.763M. 

Gasoline inventories have gone up by almost 13M barrels since 2023 began. Automotive fuel gasoline is the No. 1 U.S. fuel product.

Distillates stockpiles also rose, for the first time in five weeks. Here, there was a build of 2.32M barrels versus the expected deficit of 1.3M. In the previous week, distillate draws stood at 507,000 barrels. 

Until last week, distillates, which are refined into heating oil, diesel for trucks, buses, trains, and ships, and fuel for jets, were the strongest component of the U.S. petroleum complex in terms of demand. Prior to the build in the latest week, distillate stockpiles had fallen by around 5M barrels over four weeks.

Also weighing on the market were uncertainties over how well demand from China would fare in February, more than a month after the top crude importer abandoned all COVID restrictions.

On China’s side, crude imports were assessed at 10.98M bpd, or barrels per day, in January, down from December's 11.37M bpd and November's 11.42M bpd, a Reuters report said Thursday.

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