Oil posts biggest weekly loss in a month after reversing gains on U.S. jobs

By Barani Krishnan

Investing.com -- A smaller-but-still-healthy U.S. jobs growth for December could not help oil prices sustain a rally on Friday, with crude markets posting their biggest weekly loss in a month after one of the worst trading starts for a year.

New York-traded West Texas Intermediate crude settled up just 10 cents, or 0.1%, at $73.77 per barrel on the day, after rallying to as high as $75.45 earlier in the session.

For the week, WTI, as the U.S. crude benchmark is known, was down 8%, posting its largest weekly drop since the week ended Dec. 2. The dismal weekly showing came after WTI’s drop of 10% between Tuesday and Wednesday — the worst for any first two days of a trading year in oil since 1991. 

London-traded Brent crude settled down 12 cents, or 0.2%, at $78.57 per barrel. The global crude benchmark reached as high as $80.56 earlier on Friday. For the week, Brent was down almost 9%.

The crude price collapse in the first two days of 2023 came on the back of fresh warnings about a global recession and on fears of China falling into a coronavirus crisis similar to the one it experienced three years ago.

Friday’s initial advance in oil, which followed Thursday's rebound, came as moderating U.S. jobs growth signaled more slowing of rate hikes by the Federal Reserve.

U.S. nonfarm payrolls grew by 223,000 last month, some 40,000 below November’s level and by the smallest number since the 199,000 positions added in December 2021, the Labor Department reported. 

Last month’s payroll growth was still well above the 202,000 forecast by economists, proving the tough job the Fed has in cooling a runaway jobs market that was feeding inflation. 

But market punters still bet on the central bank doing a rate hike as small as 25 basis points at its next policy decision in February, after a 50-basis point hike in December and four back-to-back hikes of 75 basis points between June and November.

“This was a very good NFP report for oil as the labor market remains robust and wage pressures are coming down, which will allow the Fed to stop hiking fairly soon,” said Ed Moya, analyst at online trading platform OANDA. 

Oil’s progress in the coming week will be contingent on how tame — or otherwise — inflation continues to be, as markets await the release of the Consumer Price Index, or CPI, reading for December. 

The CPI expanded by 7.1% during the year to November, after hitting a four-decade high of 9.1% during the 12 months to June. The drop in inflation came after relentless rate hikes last year by the Federal Reserve, which added 425 basis points to rates between March and December. Prior to that, rates peaked at just 25 basis points, as the central bank slashed them to nearly zero after the global COVID-19 outbreak in 2020.

Despite its aggressive monetary tightening, inflation remains more than three times higher than the 2% per annum level preferred by the Fed, which has vowed to bring price pressures back to its target. 

Notwithstanding the CPI number, the bigger concern for the oil market would be China’s progress on the COVID front.

“The primary focus however remains on China as energy traders will keep a close eye on their handling of this COVID surge,” said Moya. “Since the Saudis are already slashing prices, we could hear a steady chorus of demand destruction concerns if China's COVID situation worsens.”

Saudi Arabia’s Aramco (TADAWUL:2222) oil company this week slashed the selling price of its benchmark Arab Light crude to the lowest levels since November 2021 as it attempts to compete with the persistent discounting on Russian oil after the G7 price cap of $60 per barrel on all seaborne Russian crude.