Oil Has Worst Week Since Pandemic as U.S. Jobs Signal Stiffer Rate Hikes

By Barani Krishnan

Investing.com -- Oil bulls used to beam at the U.S. jobs market with pride. Now, they aren’t so sure anymore if they should.

A barrel of U.S. crude was already hovering at six-month lows on Friday before the Labor Department reported that employers in the country added a stunning 528,000 jobs for July — more than double the level forecast by economists. 

There is a close nexus between oil prices and job numbers in the United States, with the simple logic being that x amount of fuel is needed for x number of people to commute or get around. But it gets more complicated when those same job numbers — and higher wages — lead to higher inflation, consequently, higher interest rates.

“Good news is certainly bad news here,” economist Adam Button said, referring to the U.S. nonfarm payrolls data for July.

For what it was worth, crude prices still rose from Friday’s lows to turn positive on the day after the release of the job numbers as dip-buying emerged after the cumulative drop of more than 6% in just two previous days of trading.

But oil’s performance remained dismal for the week and August-to-date, something bulls in the market would have trouble reconciling with after ginormous gains for six months from November through May.

The front-month for U.S. West Texas Intermediate, or WTI, settled below the key $90 per barrel, though in the positive. WTI’s last trade was $89.01, up 47 cents, or 0.5%, on the day. It hit a six-month low of $87.03 earlier, a bottom not seen since Feb. 1, when it went to as low as 86.55.

Previously, WTI had never forayed below $90 since the Russian invasion of Ukraine that saw a litany of sanctions imposed on Russian energy exports that sent a barrel of U.S. crude to as high as $130 by March 7.

But for this week and month, WTI is about 10% in the red, after back-to-back losses of more than 7% in July and June.

London-traded Brent, the global benchmark for crude, settled well below the $100 level, which it had not visited since the Ukraine invasion that earlier sent it to above $140 on March 7.

Brent finished the day at $94.92, up 80 cents, or 0.9%.

For the week and month, it logged an eye-watering loss of 14%, after conceding almost 7% in July and more than 4% in June. Brent also posted its worst weekly loss since the week to April 17, 2020, when it tumbled 24%.

The labor market has been the juggernaut of the U.S. economy, powering its recovery from the 2020 coronavirus outbreak. 

Unemployment reached a record high of 14.8% in April 2020, with the loss of some 20 million jobs after the COVID-19 breakout. Since then, hundreds of thousands of jobs have been added every month, with the trend not letting up in July despite a negative 0.9% growth in second-quarter gross domestic product this year, after a minus 1.6% in the first quarter that together accounted for a recession.

As thankful as the Biden administration and economic policy-makers at the Fed are for such jobs resilience, the runaway labor market — and associated wage pressures — has been a headache to monetary authorities fighting the worst U.S. inflation since the 1980s. 

Hourly wages have risen month after month since April 2021, expanding by a cumulative 6.7% over the past 16 months, or an average of 0.4% a month. Inflation, measured by the Consumer Price Index, meanwhile expanded by 9.1% in the year to June, its highest in four decades. The Fed’s tolerance for inflation is a mere 2% per year, some 4-1/2 times less than the current CPI reading.

The central bank has already hiked interest rates four times since March, bringing key lending rates from nearly zero to as high as 2.5%. It has another three rate revisions left before the year is over, with the first of that due on September 21. 

Until the jobs report released on Friday, expectations had been for a 50 basis point hike in September. Now, money market traders are pricing in a 62% chance of a 75-basis point hike for next month — the same as in June and July. Be that as it may, pump prices of U.S. gasoline — one of the main components of the CPI, have fallen from June record highs of above $5 a gallon to under $4 now, taking some measurable heat off the index.

The U.S. stock market has struggled as the Fed raised rates. The benchmark S&P 500 for the top 500 U.S. stocks is down 13% on the year, after a 20% decline in June that put the index in bear-market territory.

The U.S. dollar and Treasury bond yields — ostensibly the biggest beneficiaries of any Fed rate — took flight after the release of the job numbers. The Dollar Index  which pits the greenback against six majors led by the euro, hit a one-week high of 106.81.

The benchmark 10-year Treasury note for yields hit a two-week high of 2.87%.

For oil bulls, further strength in the dollar and yields and weakness in stocks could mean more losses in crude.

Charts show WTI risks falling to as low as $82, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“A break of the 50-week Exponential Moving Average of $93.16 exposes WTI to the horizontal support areas of $88, $85 and ultimately $82,” said Dixit.

Some think there is a chance of WTI breaking even below $80 in the coming week.

“It all depends on the temperature that Fed officials set for September rates in their speaking engagements next week,” said John Kilduff, partner at energy hedge fund Again Capital. “Before this jobs data, the chance for a 100-basis point hike looked completely remote. Now, I wouldn’t say it’s that outlandish anymore.”