DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange lost 2% in value during Friday's session, with all petroleum contracts registering weekly losses amid a one-two punch of a stronger U.S. dollar following a blowout employment report for January showing much stronger-than-expected job growth, and hope for a ceasefire agreement between Israel and Hamas, with both sides reportedly closing in on a tentative deal to exchange hostages.

Oil traders continued to unwind a geopolitical risk premium tied to the conflict in the Middle East after Qatari officials, who mediated talks between Hamas and Israel, said both sides have given initial approval for a ceasefire agreement.

"We tried to blend things together to come up with some sort of reasonable ground that brings everybody together," said Qatar's prime minister, Sheikh Mohammed bin Abdulrahman bin Jassim Al Thani at Washington's Atlantic Council think tank on Monday.

While no oil supplies have been disrupted since the outbreak of the war on Oct. 7, the risk of hostilities spilling over into the broader Middle East region kept oil traders on edge. The fear is highlighted by actions by Iranian-backed militias in the Middle East, notably the Houthis in Yemen, who have consistently attacked commercial vessels in the Red Sea region since October, forcing some oil tankers to undertake costly rerouting around Africa's Cape of Good Hope, spiking freight rates.

In financial markets, the U.S. dollar spiked 0.88% against a basket of foreign currencies to finish the volatile week at a 1-1/2 month high 103.781, as investors reacted to job growth of 353,000 by the U.S. economy in January, far exceeding expectations for a 170,000 gain. The national unemployment rate remained unchanged at 3.7% for the third consecutive month.

The January employment report typically sees large seasonal adjustments for prior months which are designed to smooth out monthly volatility, with a consensus calling for a sizable downward revision for both November and December. Therefore, it was quite a surprise for markets when the Bureau of Labor Statistics instead revised jobs gains higher for both November and December by a combined 126,000. BLS also reported average hourly earnings in January rose 19 cents or 0.6% to $34.55, lifting annualized wage growth to 4.5% at the start of 2024.

January's employment report offered further testament to the strength of the U.S. economy, with the International Monetary Fund earlier this week revising higher its forecast for U.S. gross domestic product for 2024 by 0.6% from its October outlook to 2.1%. However, strong job growth and higher wages add to inflationary pressures, complicating the Federal Reserve's path to lowering interest rates.

The Federal Open Market Committee on Wednesday left the federal funds rate unchanged in a 5% by 5.25% target range and signaled it would not be rushed into lowering rates unless either inflation starts cooling more rapidly or the labor market starts shedding jobs.

In reaction to the data, investors all but priced out the likelihood for the FOMC to cut the federal funds rate in March, with odds for a May rate cut having also fallen sharply.

"I think we could still see rate cuts certainly this year but how many and how quickly those start I think today's report is a reminder not to get ahead of ourselves on that," said Esther George, the former president of the Federal Reserve Bank of Kansas, adding that "I'd be resetting my own expectations around how soon rate cuts should come and say the economy has held up pretty well."

At settlement, West Texas Intermediate futures for March delivery dropped back $1.54 to $72.28 bbl, while international crude benchmark Brent April futures declined $1.37 bbl to $77.33 bbl. NYMEX March RBOB futures fell $0.0473 to $2.1475 gallon, while the March ULSD contract eroded $0.0529 to $2.66 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com