Oil prices plunged sharply on Friday, marking the steepest weekly loss in three months. This downward trend was largely driven by investors’ assessments of weak U.S. jobs data and the potential timing of a Federal Reserve interest rate cut.
Brent crude futures for July settled at $82.96 per barrel, a decrease of 71 cents or 0.85% from the previous day. Similarly, U.S. West Texas Intermediate crude for June fell by 84 cents or 1.06% to $78.11 per barrel.
This decline was largely attributed to concerns that prolonged higher borrowing costs would hinder economic growth in the U.S., the world’s leading oil consumer.
The Federal Reserve’s decision to maintain interest rates earlier in the week had sparked fears that higher-for-longer borrowing costs would curb economic growth and subsequently impact oil demand. Brent experienced a decline of over 7% for the week, while WTI fell by 6.8%, marking a weekly loss.
Oil prices drop after US employment data lifts USD (Credits: IG)
The U.S. jobs data released on Friday revealed a slower-than-expected job growth in April, accompanied by a cooling of annual wage gains. This development prompted traders to speculate that the U.S. central bank may implement its first interest rate cut in September.
According to Tim Snyder, an economist at Matador Economics, “The economy is slowing a little bit… But (the data) gives a path forward for the Fed to have at least one rate cut this year.”
The market is currently repricing the expected timing of possible rate cuts following the release of softer-than-expected monthly jobs data, as noted by Giovanni Staunovo, an analyst at UBS. Higher interest rates typically weigh on the economy and can reduce oil demand, making the potential timing of rate cuts a crucial factor in oil price movements.
In addition to market concerns, U.S. energy companies have been reducing their oil and natural gas rigs operating in the country. According to Baker Hughes, the number of oil and gas rigs operating fell by eight to 605 on May 3, marking the largest weekly decline since September 2023.
The number of oil rigs specifically fell by seven to 499, the most significant weekly drop since November 2023. Geopolitical risk premiums, which had previously supported oil prices due to the Israel-Hamas war, have faded as the two sides consider a temporary ceasefire and engage in talks with international mediators.
Oil falls about 3% as strong U.S. jobs data prompt interest rate (Credits: CNBC)
Looking ahead, the next meeting of OPEC+ oil producers, scheduled for June 1, may also impact oil prices. Three sources from the OPEC+ group indicated that the voluntary oil output cuts may be extended beyond June if oil demand does not increase.
Money managers have been adjusting their positions in the oil market, with the U.S. Commodity Futures Trading Commission (CFTC) reporting a reduction in net long U.S. crude futures and options positions in the week ending April 30. As the oil market continues to evolve, investors will closely monitor these developments and their potential impact on oil prices.
