By Barani Krishnan
Investing.com -- Unemployment and inflation, in theory, are at odds with each other. Taken simply, when more people are unemployed, price pressures are less. But on a deeper level, the so-called inverse relationship is more complicated. And it can break down. For instance, the blowout U.S. jobs numbers for January released Friday, on the back of what the Fed calls disinflation. And this week’s oil market crash on that.
Historically, there has been a strong positive correlation between jobs and crude prices. And that’s quite logical. When a greater number of people have jobs and are commuting to them (notwithstanding the post-pandemic work-from-home culture), the more transportation fuels, gasoline included, would be needed to move them around.
So, not surprisingly, upon release of the January nonfarm payrolls, or NFP, report from the Labor Department, crude prices rose more than 2.5% as oil bulls tried to exploit the typical connection between such data and energy demand.
But the dollar’s rapid surge on the same jobs report put paid to crude’s advance.
Oil eventually capsized in a sea of red with gold and other commodities as the dollar’s rebound from 10-month lows made raw materials priced in the U.S. currency costlier for non-dollar holders.
Crude prices settled the week down 7%, taking global benchmark Brent to below $80 per barrel while bringing WTI, or the U.S. West Texas Intermediate, to the low $70s.
It proved one thing: Good U.S. jobs numbers are no longer an assurance for higher oil prices - not when you have a rebounding dollar and rate uncertainty to contend with.
According to the NFP report, some 517,000 jobs were added last month - almost three times above the forecast growth of 185,000 and against December’s number of 260,000. The outperformance threw a fresh challenge to the Federal Reserve, which had been hoping its aggressive rate hikes over the past year would have sufficiently cooled the labor market and wages to get inflation back to its target.
The Dollar Index and yields on the U.S. 10-year Treasury note, which act as contra trades against risk assets that include stocks and commodities, surged on the NFP report. They could continue rising if the Fed rethinks its plan about further consolidating rate hikes this year. The central bank went from a 50-basis point rate hike in December to 25-basis points in February.
As though sensing a tougher challenge for this year, Fed Chair Jerome Powell told a news conference on Wednesday that while the pace of job gains had slowed late last year, “the labor market continues to be out of balance”.
The Fed has increased rates by 450 basis points in a monetary tightening cycle that began in March 2022, two years after the coronavirus outbreak, which led to trillions of dollars in relief spending that pumped up the economy and triggered runaway inflation.
Inflation, as measured by the CPI, or Consumer Price Index, hit four-decade highs in June when it expanded at 9.1% yearly. In December, the CPI grew at 6.5% per annum, its slowest since October 2021. But it was still more than three times the Fed’s target of 2% per annum.
Yet, Powell saw it fit to say that “for the first time, the disinflationary process has started.”
“We can see it,” he said. “We see it really in goods prices so far.”
Fed maneuvers aside, oil prices were on the back foot after a sixth straight weekly build in U.S. crude, along with surpluses in fuels, reported by the EIA, or Energy Information Administration, this week.
U.S. crude inventories rose by 4.14M barrels during the week ended Jan. 27, the EIA said in its Weekly Petroleum Status Report. The build was above the 0.376M forecast by industry analysts and compared with the rise of 0.533M reported by the EIA during the previous week to Jan 20.
For context, the EIA has reported a total crude build of 34.5M barrels over the past six weeks. At current standing, crude stockpiles are at the highest since June 2021, said the EIA, the statistical arm of the U.S. Energy Department.
On the gasoline inventory front, the EIA cited a build of 2.576M barrels, versus the forecast of 1.442M and the previous week’s rise of 1.763M.
Gasoline inventories have gone up by almost 13 million barrels since 2023 began. Automotive fuel gasoline is the No. 1 U.S. fuel product.
Distillates stockpiles also rose, for the first time in five weeks. Here, there was a build of 2.32M barrels versus the expected deficit of 1.3M (NYSE:MMM). In the previous week, distillate draws stood at 507,000 barrels.
Until last week, distillates - which are refined into heating oil, diesel for trucks, buses, trains, and ships, and fuel for jets - were the strongest component of U.S. petroleum demand. Prior to the build in the latest week, distillate stockpiles had fallen by around 5 million barrels over four weeks.
"Commercial storage in North America is ample," Norbert Ruecker, economist at the bank Julius Baer, said in comments carried by Reuters. "The improved market mood has lifted prices of late, but this support should remain temporary. We see lower prices longer term, in line with the futures market’s expectations."
Also weighing on the market was OPEC+’s decision this week to leave production levels unchanged and uncertainties over how well demand from China would fare in February - more than a month after the top crude importer abandoned all COVID restrictions.
On China’s side, crude imports were assessed at 10.98M bpd, or barrels per day, in January, down from December's 11.37M bpd and November's 11.42M bpd, a Reuters report said Thursday. Part of the decline in Chinese imports was likely due to the Lunar New Year holiday, which fell on January 22 this year, the report added.
ANZ analysts concurred with that, noting a sharp jump in traffic in China’s 15 largest cities following the Lunar New Year holiday but acknowledging that Chinese oil traders had been “relatively absent” from the market.
Despite this, Asia’s total crude oil imports jumped by 11.1% month over month to 29.13 million bpd in January. The imports last month beat the previous record from November, when Asia imported 29.10 million bpd of crude oil. This is the sort of data that those long the market are counting on for a rebound of the market in the coming weeks.
The European Union's new sanctions on Russian fuel products, which came into force on Sunday, could hit Moscow's energy revenue, but are unlikely to weigh on its overall production, said Matt Smith, lead oil analyst at Kpler.
A coalition of Group of Seven economies, the EU and Australia set caps at $100 per barrel on products that trade at a premium to crude, principally diesel, and $45 per barrel for products that trade at a discount, such as fuel oil and naphtha. The same group on Dec. 5 set a $60 cap on Russian crude oil.
Like the crude price cap, the ones on Russian fuels will further weigh on the flat price of diesel and other products, even if the limits are way above selling prices, said Smith.
That will fulfill another agenda of the G7 and its allies, that is seldom discussed in the media. And that is to make sure Russia’s oil and energy products reach the markets, but not at the prices the Kremlin wants.
The Biden administration, particularly, is hoping the caps will force Vladimir Putin to put out even more barrels to fund his war against Ukraine. That will indirectly suppress global energy prices further - a gift to fighting inflation.
Oil: Market Settlements and Activity
New York-traded West Texas Intermediate, or WTI, crude for March had a final trade of $73.23 on Friday, after settling at $73.39 a barrel, down $2.49, or 3.2% on the day. For the week, WTI dropped by just over 7.5%. Month-to-date, the U.S. crude benchmark was also down about 7%, extending its near 9% slide over three previous months.
London-traded Brent crude for March delivery registered a final trade of $79.82, after settling at $79.94, down $2.23, or 2.7%. Brent earlier hit a three-week low at $79.89. For the week, the global crude benchmark was down about 7.5%, after last week’s near 3% loss. For February thus far, Brent has lost 5.4%, extending its 6.5% slide since the end of December.
Oil: Price Outlook
WTI’s technicals point to a chance of a further drop below $70 per barrel in the coming week, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“Despite a previously strong upward move, WTI failed to hold temporary gains and fell from a $80.50 weekly high and closed at $73.20, well below the $76.40 and $75.50 support,” Dixit said.
Any recovery towards $75.40 and $76.40 will attract sellers, resuming a decline towards the 50-month Exponential Moving Average of $71.80 and the December low of $70.10, Dixit said.
The U.S. crude benchmark’s long-term support of the 200-week Simple Moving Average of $65.78 remains untested, he added.
Natural gas: Market Settlements and Activity
Natural gas futures tumbled 21% for the week as the heating fuel continued its descent into a seemingly bottomless abyss despite the arrival of freezing weather in the key Northeastern U.S. region, which until this week had experienced an unusually warm winter.
The front-month March gas contract on the New York Mercantile Exchange’s Henry Hub settled down 4.6 cents, or 1.8%, at $2.385 per mmBtu, or million metric British thermal units. The session bottom was $2.343, which marked a low not seen since Dec. 29, 2020, when it fell to $2.282.
For the week, the benchmark gas futures contract lost 21%, extending to almost 65% its tumble from December’s $7 high. Prior to that, it traded at a 14-year peak of $10 in August.
An unusually warm start to the 2022/23 winter has led to considerably less heating demand in the United States versus the norm, leaving more gas in storage than initially thought.
At the close of last week, U.S. gas storage stood at 2.583 tcf, or trillion cubic feet, up 9.4% from the year-ago level of 2.361 tcf, data from the Energy Information Administration showed.
Since the start of this week though, the weather has been colder, reaching 20 Fahrenheit (-6.7 Celsius) on Friday in New York City and some other key locations in the U.S. Northeast, which accounts for the largest heating market in the United States.
Natural gas: Price Outlook
“Gas has gone to extreme oversold conditions and its weekly Relative Strength Index is now at 28, matching the pattern of the 8 bearish weeks during its decline from a $10 peak to $4.75,” said Dixit of SKCharting.
He said a short-term rebound from this week’s $2.35 low was a possibility, but this needs clear acceptance above $2.87 for an upside potential towards $3.30.
“Sustainability below $2.87 will keep prices under pressure and trying to dig deeper.”
Gold: Market Settlements and Activity
Gold tumbled almost 3% on Friday after a blockbuster U.S. jobs report for January triggered profit-taking on the precious metal’s long-running rally, putting it way off the $2,000-an-ounce target eyed by bulls in the space.
Gold for April delivery on New York’s Comex did a final trade of $1,877.70 on Friday, after settling at $1,868.30 an ounce, down $53.90, or 2.8%. It hit a four-week low of $1,874.55 during the session.
It was the first time since Jan. 12 that gold’s $1,900 support on Comex had crumbled.
The spot price of gold, more closely followed than futures by some traders, was at $1,864.93, down $47.64, or 2.49%.
Gold’s plunge came as the Dollar Index and yields on the U.S. 10-year Treasury note surged after the U.S. Labor Department reported a non-farm payrolls growth for January that was almost three times above forecast, throwing a fresh challenge to the Federal Reserve’s hopes of seeing a cooling of the labor market and wages to get inflation to its target.
Gold: Price Outlook
Dixit noted that it took gold just two days to undo its 30-day climb from $1,860 to $1,960.
“Going in to the week ahead, gold needs to hold defense at the 50-Day EMA of $1,854, failing which the metal runs the risk of a correction extending toward $1,842 and $1,828,” he said.
Any recovery, meanwhile, faces challenges at $1,878-$1,885, followed by $1,900-$1,914. before retesting major resistance and supply zone at $1,929, Dixit said.
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.