CRANBURY, N.J. (DTN) -- Oil futures with nearest delivery traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange sold off Friday afternoon as the U.S. dollar strengthened on a robust employment report, with healthy job gains coming alongside rising wages that suggested the Federal Reserve would hike interest rates, triggering a massive selloff in equities.
Oil futures were also down on the week, while a 2.8% decline in Brent futures outpaced a 1.0% decrease in WTI, narrowing Brent's premium to a $3.13 bbl six-month low.
A more-than-expected 200,000 increase in U.S. nonfarm payroll and the fastest growth in wages in at least eight years in January reported this morning by the Bureau of Labor Statistics boosted the U.S. dollar off a near three-year low, with the greenback having an inverse relationship with West Texas Intermediate.
While the dollar remains weak, the strong jobs report and especially robust wage growth boosted inflation expectations, and seemed to put a lock on the Federal Reserve's decision that monetary tightening policy, which is still quite loose, would pick up pace this year. On Wednesday, the Federal Open Market Committee unanimously agreed to hold the federal funds rate unchanged at 1.5% during Chair Janet Yellen's final meeting, which was widely expected. However, the news release following their meeting, which is always closely parsed for hints on Fed thinking and direction, suggested the market's expectation for three rate hikes is baked in. Some in the market now think there could be four rate hikes this year, with a rate hike at the next FOMC meeting in March seen as a done deal.
Higher borrowing costs are bearish for equities, which combined with disappointing earnings from technology companies and a selloff in government bonds to accelerate a selloff in equities after major indexes had repeatedly surged to new highs. The Dow Jones International Average tumbled by more than 675 points or 2.6% late afternoon and the S&P 500 Index lost more than 60 points or 2.2% of its value amid the drubbing.
For the oil market, the selloff in equities and government bonds were joined by a six-rig increase in the U.S. oil rig count to a 765 nearly six-month high, with new rig deployment up 18 over the two-week period ended today. Canada's oil rig count jumped 14 to 234, which is up 37 year-on-year added Baker Hughes.
The reactivation of oil rigs followed Wednesday's weekly oil report from the Energy Information Administration showing a 41,000 bpd boost in U.S. crude oil production to 9.919 million bpd for the period ended Jan. 26. EIA also released monthly data, which has a two-month lag, reporting U.S. crude production topped 10.0 million bpd in November 2017 for the first time since 1970 at 10.003 million bpd. The EIA forecasts U.S. crude production to average at a record high 10.27 million bpd this year for annual growth of 1.0 million bpd.
Strong compliance by the Organization of the Petroleum Exporting Countries and their 10 non-OPEC oil producers with their agreement cutting 1.8 million bpd in crude production and a freefall in Venezuelan oil production are seen offsetting the growth in U.S. output.
On Thursday, Reuters said compliance with the agreement was 138% in January, up from 137%. The agreement took effect Jan. 1, 2017 and runs through the end of 2018, with Saudi Arabia and Russia late last month both indicating some form of the accord would continue into 2019.
Venezuela is a member of OPEC, helping the coalition achieve its high rate of compliance as its crude oil production tumbles amid underinvestment and mismanagement. OPEC data shows Venezuela crude production averaged about 1.7 million bpd in December, down from 2.4 million bpd in 2015, with Barclays estimating output could decline to 1.4 million bpd this year.
After an outside down session, March WTI futures settled down 35cts at $65.45 bbl, while slipping 69cts from prior Friday. April Brent crude, which moved into the nearest delivered position on Thursday, tumbled $1.07 to $68.58 bbl, with Brent as a spot contract down $1.94 or 2.8% on the week.
WTI's narrowing discount with Brent could limit U.S. crude exports, which jumped 354,000 bpd to a 1.765 million bpd 2-1/2 week high last week.
NYMEX March ULSD futures settled down 3.69cts at $2.0535 gallon in an outside down session, and on a spot continuous basis, lost 8.25cts or 3.9% from prior Friday.
NYMEX March RBOB futures declined 2.38cts to $1.8720 gallon, and on the week the spot contract is down 6.57cts or 3.4%. RBOB futures pared a decline to a better than two-week spot low of $1.8428 gallon.
Brian L. Milne can be reached at email@example.com
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