WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Friday's session lower with the exception of ULSD, although all petroleum contracts finished stronger week-on-week as investors repriced the geopolitical risk premium and capacity of OPEC+ producers to increase oil supplies in coming months, while weakness in equity markets further pressured the oil complex.
U.S. equities moved lower on Friday, with the sell-off accelerating into the weekend as investors positioned ahead of next week's Federal Open Market Committee meeting. The market appears to be convinced there will be a hike in the federal funds rate in March, according to the CME FedWatch tool. Investors assign an 84.8% probability that the central bank will increase overnight lending interest rates by 25 basis points at its March 16 meeting, which is seen as the first in a series of rate increases this year. While the Fed is attempting to rein in rampant inflation by normalizing monetary policy, economic data this week painted a worrisome picture of the labor market.
Weekly unemployment claims rose more than expected last week, climbing to the highest level since October at 286,000. The fresh data likely reflects layoffs related to the omicron variant, as well as seasonal employment changes in the period following the holidays, according to the analysts.
This week's oil rally that lifted crude prices to more than seven-year highs fizzled Friday amid weakening geopolitical risk premium after talks between the United States and Russia that appear to be keeping the threat of a broader war in the Ukraine at bay. U.S. Secretary of State Antony Blinken met Friday with his Russian counterpart, Foreign Minister Sergey Lavrov, on neutral ground in Geneva to try to ease tensions along the Russian-Ukrainian border. It was clear that Blinken did not give Moscow direct answers to its security demands on Friday, but the meeting appears to have bought some more time and diffuse the tensions.
"I laid out several ideas to reduce tensions and increase security," Blinken said, noting the ideas had been formulated with American allies in Europe and there could be no military resolution to the standoff in Ukraine.
Separately, investment bank Morgan Stanley said oil prices would hit $100 barrel (bbl) by the third quarter as gains in global oil demand will continue to outpace supply growth. The forecast was increased from a $90 bbl less than two weeks ago.
"End-user demand has been strong enough to allow for both crude prices to rise and crack spreads to expand on top of that," said the bank. "Also, scheduled flights still point to a 1.5 million barrels per day (bpd) increase in jet fuel demand by the summer, and Google Mobility data is up sharply year on year. So far, current prices do not seem to have held back the demand recovery."
This week, International Energy Agency revised higher its 2022 demand outlook by 200,000 bpd, forecasting year-on-year consumption growth of 3.3 million bpd. The Paris-based agency also raised its demand growth forecasts for 2021 by 200,000 bpd to 5.5 million bpd. Total demand this year should stand at 99.7 million bpd, projected IEA, around 200,000 bpd more than 2019. Last month IEA expected this year's oil demand to be broadly on par with pre-pandemic levels.
"At the current speed of transmission, a large part of the population will likely have gained immunity by infection or vaccination by the end of the first quarter," said the Paris-based agency. "As a result, restrictions to mobility could be minimal in the second half of the year."
On the session, West Texas Intermediate March contract fell to $85.14 bbl, down $0.41, and international crude benchmark Brent for March delivery declined $0.49 to $87.89 bbl. NYMEX February RBOB futures dropped back 1.98 cents to $2.4424 gallon, and the front-month ULSD contract gained 1.94 cents to $2.6912 gallon.
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