DTN Oil

WASHINGTON (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange kicked off September with an explosive rally after August's U.S. employment report signaled the labor market is losing its post-pandemic steam, with market participants sharply reducing the odds of another rate increase by the Federal Reserve by the end of the year.

U.S. crude benchmark topped $85 bbl on Friday for the first time since November 2022 amid growing speculation Saudi-led OPEC+ would continue to restrict supplies into the fall months and on reduced bets for the Fed to hike interest rates that slow the U.S. economy.

The U.S. labor market added 187,000 new jobs in August, less than the average monthly gain of 271,000 over the prior 12 months, according to data released this morning from the Bureau of Labor Statistics. Although the headline figure precisely matched market expectations, the unemployment rate climbed to 3.8% from July's 3.5%, reflecting greater labor force participation that rose to 62.8% last month after holding flat since March. More people in the labor force is what the Federal Reserve has been targeting ever since it started its rate hiking campaign in March 2022. What's more, hourly wage growth softened to a 0.2% month-on-month increase -- the smallest increase since February 2022.

"The report is a step down to a soft-landing road. It should please policymakers, both on Constitution Avenue and on Pennsylvania Avenue," said former Treasury Secretary Larry Summers in a Bloomberg interview.

While it was already unlikely that the Federal Open Market Committee would lift the federal funds rate when they meet next on Sept. 20, the August employment rate diminished the probability that central bank officials would hike the benchmark interest rate when they meet in November, according to CME's FedWatch Tool.

At last month's annual economic symposium at Jackson Hole, Wyoming, Fed Chairman Jerome Powell signaled that the central bank is prepared to lift the federal funds rate further should the labor market remain tight, and inflation accelerates. Although headline inflation in the United States eased to 3.2% last month from its peak of 9.1% in June 2022, Powell warned that the risks of reacceleration are still embedded in the economy.

Labor market strength has been a key driver for the resilient U.S. economy and stubbornly high inflation this year, supporting consumption and aggregate demand.

Friday's move higher in the oil complex also follows reports suggesting oil exports from Saudi Arabia fell for the fifth straight month in August to just 5.6 million bpd -- their lowest export rate since early 2021.

The kingdom's oil production averaged just a hair above 9 million bpd over the July-August period as it enacted a unilateral production cut of 1 million bpd. The speculation now growing is that Riyadh will roll over supply curtailments into October, further limiting global supply availability and prompting inventory drawdowns.

Commercial oil inventories across Europe, North America and Japan fell by more than 14 million bbl at the start of August, according to estimates from the International Energy Agency, with the sharp downturn driven by a combination of record demand gains and steep production cuts by OPEC+.

On the session, WTI October futures on NYMEX advanced $1.92 to $85.55 bbl -- the highest settlement by a front month contract in 2023, and international crude benchmark Brent for November delivery rallied $1.72 to $88.55 bbl, also a 2023 spot high.

NYMEX RBOB October futures settled the session at $2.5912 gallon, up $0.0253 on a contract basis, although $0.1752 lower than the September contract's expiration on Thursday at $2.7664 gallon. The October contract gapped down $0.1426 gallon on the spot continuous chart, reflecting lower demand expectations following the summer driving season and easing fuel specification requirements.

NYMEX ULSD October futures were an outlier, settling the first trading session of September with a modest loss at $3.1050 per gallon.

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