Oil Futures Fall as Bullish Jobs Data Could Spark Tapering

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Nearest-delivered oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange ended Friday's session lower, and registered steep losses for the first week of August. Friday's selling was sparked by a bullish employment report that could prompt the Federal Reserve to begin reining in its accommodative monetary policy, rallying the U.S. dollar on the prospect.

The Labor Statistics Bureau Friday morning reported job growth of 943,000 for July, above expectations for job gains of 900,000, and revised higher job totals for the previous two months by a combined 119,000. That lifted job growth for June above 900,000 to 938,000, while the national unemployment rate fell 0.5% to 5.4% in July, the lowest the jobless rate has been since the pandemic disrupted the U.S. economy in March 2020 when it was 4.4%. In February 2020, the national unemployment rate was at a 3.5% 50-year low.

Market expectations heading into Friday's Labor Department report were muddled, ranging from expected job growth of 350,000 to 1.2 million for July, as industry observers were in a quandary over the effect of the latest wave of COVID-19 infections that some suggested would slow hiring. Others pointed to robust economic growth, expecting strong job gains to continue, with an extra layer of federal unemployment benefits atop of state insurance set to expire in early September seen as another instigator in pushing the jobless to seek work.

The U.S. dollar jumped 0.6% in index trading to a 92.8 two-week high settlement, further pressuring West Texas Intermediate futures.

Strong economic growth and spiking inflation had raised the question of when the central bank would begin tapering the $120 billion in monthly purchases of Treasuries and mortgage-backed securities, with the goal of the bond buying to depress long-term interest rates to spur investment. The Fed is also holding the federal funds rate between 0% and 0.25%.

Fed Chairman Jerome Powell said multiple times, as did other officials with the central bank, that the jump in inflation is due to transitory factors caused by pent-up demand unleashed by the economy's reopening and consumers flush with cash from generous federal largesse. Powell said the Fed would allow inflation to run high for longer to spur job growth. With job growth over 900,000 for two straight months, and expectations for strong employment gains to continue for the next couple of months, some suggest the Fed might wait too long to tamp down inflationary pressure. One of those worried over this possibility is U.S. Senator Joe Manchin who wrote a letter to Powell and the Federal Open Market Committee on Thursday.

"With the recession over and our strong economic recovery well underway, I am increasingly alarmed that the Fed continues to inject record amounts of stimulus into our economy," wrote the West Virginia Democrat. "I am deeply concerned that the continuing stimulus put forth by the Fed, and proposal for additional fiscal stimulus, will lead to our economy overheating and to unavoidable inflation taxes that hard-working Americans cannot afford."

Oil futures notched big losses on the week, as a wave of COVID infections in southeast Asia triggered by a highly infectious Delta variant caused widespread lockdowns and factory closures in exporting economies, including China and Vietnam, that are seen exacerbating an already stressed global supply chain, while also cutting into fuel consumption. Beijing is using a heavy hand in its attempts to stomp out the virus, including locking down neighborhoods and cities, enforcing mandatory testing of the 11 million residents of Wuhan, the source of COVID-19, and suspending air travel and rail service for certain cities. This has led to weaker oil imports for Asia despite growing demand for India, which has emerged from a dreadful wave of COVID-caused deaths, with floating storage reported climbing to a four-month high.

NYMEX September WTI futures settled down $0.81 on the session and lost $5.67 or 7.7% in value on the week, ending the week's trading at $68.28 per barrel (bbl). ICE October Brent futures settled at $70.70 per bbl for a session loss of $0.59 and a weekly loss of $5.63 or 7.4%.

NYMEX September RBOB futures fell 3.71 cents Friday to a $2.2569 gallon settlement, while 11.26 cents or 4.8% lower on the week on the spot continuous chart. September ULSD futures eased 2.15 cents to a $2.0845 settlement, while 11.49 cents or 5.2% lower than the prior Friday.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne