Oil Futures Gain as USD Retreats Ahead of Employment Report

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- With the exception of a fifth straight lower session for the ULSD contract, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange shifted higher in early trade Friday, with the U.S. crude benchmark moving above $88 barrel (bbl), helped by a sharp drop in the dollar index as traders positioned ahead of the August employment report that is likely to show a tight labor market despite a series of 75-basis-point rate hikes by the U.S. Federal Reserve in its fight against inflation.

The U.S. economy likely added 300,000 new jobs in August, a slower pace than the 528,000 new positions in July but would still reflect strong employment growth. The national unemployment rate is expected to remain at a five-decade low of 3.5%, while wage growth is seen accelerating to 5.2% in the 12 months ending in August. Should Friday morning's employment report come in stronger than expected, it would solidify the case for the Federal Open Market Committee to deliver a third consecutive 75-basis-point hike in the federal funds rate when they meet next on Sept. 20-21.

Last week, Fed Chairman Jerome Powell signaled interest rates would continue to increase and stay higher for a prolonged period until the central bank sees clear evidence that inflation is abating.

"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into a better balance. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," said Powell during the Fed's annual symposium in Jackson Hole, Wyoming, on Aug. 26.

Recent economic data shows the labor market continues to be a bright spot in an otherwise slowing economy. Unemployment claims fell for a third consecutive week through Aug. 27 to a two-month low 232,000, while the number of new job openings still exceed the number of unemployed. The Job Openings and Labor Turnover survey released Tuesday showed job openings climbed past 11.2 million in July -- meaning there are still roughly two available jobs for each individual looking for work.

Internationally, Chinese metropolis of Chengdu imposed a sweeping citywide lockdown on Thursday evening, confining 21 million residents to their homes as the country doubles down on its zero-COVID policy ahead of the twice-a-decade Communist Party Congress that begins Oct. 16. This is China's largest citywide lockdown since Shanghai, the financial hub of 25 million people, emerged from a painful two-month lockdown in June.

The city accounts for about 1.7% of China's gross domestic product and is home to major technology and automakers companies, including Toyota Motor Corp. and Foxconn Technology Group, the world's largest assembler of Apple Inc.'s iPhones, and Intel Corp., among others. All of China's 31 provinces have reported COVID-19 infections in the past ten days, according to Chinese health authorities, a troubling sign for the world's second largest economy as it battles yet another resurgence of the Omicron variant.

The China lockdowns are troubling news for a global oil market plagued by growing signs of demand destruction in the United States and the European Union.

Near 7:30 a.m. EDT, NYMEX October West Texas Intermediate futures advanced $1.38 to $88 bbl, while international crude benchmark Brent contract for November delivery traded near $93.80 bbl, up $1.44. NYMEX October RBOB futures rallied 5.84 cents to $2.4442 gallon, and NYMEX October ULSD futures fell to $3.5444 gallon.

The U.S. Dollar Index, which has an inverse relationship with WTI, retreated from a 20-year high 109.370 to trade 0.30% lower.

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

Liubov Georges