Oil Futures Gain despite Signs US Labor Market Overheating

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -- West Texas Intermediate and RBOB futures traded on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange advanced on Thursday even as investors fretted over stronger-than-expected labor market data in the United States and Eurozone that defy hope for a near-term correction in inflation, paving the way for central banks to remain hawkish on raising interest rates into restrictive territory.

U.S. weekly unemployment claims fell again during the final week of February to 190,000, highlighting a tight job market that is now contributing to inflationary pressures. Separate figures from the U.S. Labor Department showed labor costs climbed at an annualized 3.2% rate in the fourth quarter 2022 -- nearly three times the preliminary estimate. That is good news for the economy but bad news for the Federal Reserve that needs to contend with a labor market that is teetering on the edge of overheating despite the central bank's efforts to slow down hiring.

In the short term, a strong labor market is supportive for gasoline demand in the United States as more people return to the labor market and turn to services and away from the consumption of goods. U.S. Energy Information Administration reported on Wednesday gasoline demand climbed above 9.1 million bpd in the final week of February -- the highest weekly consumption rate since the holiday week ended Dec. 22.

The labor market and gasoline demand in the U.S. have a close correlation, meaning demand for the transportation fuel is likely to push higher this Spring and into the driving season.

In the medium to long term however, a tight labor market will feed inflation and translate into more rate hikes by the U.S. Federal Reserve that raised its benchmark lending rate by 4.5% last year -- the fastest tightening cycle in decades. Several Fed presidents back a "higher for longer" approach that, at least in theory, should take some steam out of the hot labor market.

Lending support to U.S. crude benchmark is a surge in oil exports from U.S. ports that EIA pegged at the record-high 5.6 million bpd for the final week of February. Analysts believe that the actual figure is likely 1 million bpd lower due to a large adjustment factor that could have distorted the inventory report. Even so, traders anticipate that the volume of U.S. crude oil shipped to the global market, particularly to the European Union, will continue to rise this year as G7 and EU countries seek to replace sanctioned Russian barrels.

For context, total U.S. exports to the European Union reached 1.75 million bpd in 2022 -- an increase of 70% over 2021's export rate. Meanwhile, Russian oil exports to the EU have been reduced to a minuscule 350,000 bpd, down from 4.5 million bpd seen over 2021. The EU banned seaborne crude oil imports from Russia starting on Dec. 5, 2022, followed by a similar ban on oil products, including distillate, gasoline, and fuel oil, on Feb. 5.

Additionally, beginning in June WTI Midland will become one of the deliverable crude streams into the Brent forward contract and used as one of the crude streams in the Dated Brent pricing mechanism. The current crude basket for the Brent forward contract, which includes Forties, Oseberg, Ekofisk and Troll crude grades, consists only of North Sea blends. The change will further support open interest for WTI derivatives.

At settlement, NYMEX WTI April contract advanced $0.47 to $78.16 bbl, while the international crude benchmark Brent contract for May delivery gained to $84.75 bbl, up $0.44 bbl. NYMEX RBOB April futures added $0.0255 to $2.7003 gallon, and ULSD April futures softened $0.0076 to $2.8662 gallon.

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

Liubov Georges