The commodities market in 2022 has been nothing short of a rollercoaster ride, especially in the Oil and Energy market, where the volatility is similar to that seen in the cryptocurrency market which is very unusual. Ever since the pandemic of 2020, the oil market saw its fair share of volatility, with the global benchmark, the brent crude oil, trading as low as $21 a barrel in April 2020, at the peak of the pandemic, to trading as high as $139 when Russia invaded Ukraine.
However, it would seem as though the era of high oil prices will soon be a thing of the past as the global benchmark posted a weekly decline nearing 14%. This comes after conceding almost 7% in July and more than 4% in June. The decline seen last week is also the benchmark’s worst weekly loss since the week to April 17, 2020, when it tumbled 24%.
In the past, oil bulls used to beam at the U.S. jobs market with pride. Now, they aren’t so sure anymore if they should. There is a close nexus between oil prices and job numbers in the United States, with the simple logic being that more fuel is needed for more people to commute or get around. But it gets more complicated when those same job numbers and higher wages lead to higher inflation and consequently, higher interest rates.
What is moving the market
The two benchmark’s performance has remained dismal for the week, something bulls in the market would have trouble reconciling with after the gains the benchmarks have seen since the start of the oil bull run from November through May.
According to data on Friday’s closing price, a barrel of U.S. crude oil was already hovering at six-month lows on Friday before the Labor Department reported that employers in the country added a stunning 528,000 jobs for July. This addition beat the forecast by The Economist by 111.20% as analysts estimated a 250,000-job addition for the month in question. economist Adam Button said, referring to the U.S. nonfarm payrolls data for July, “Good news is certainly bad news here.”
News continues after this ad
Although not significantly, oil prices still rose from Friday’s lows to turn positive on the day after the release of the job numbers as dip-buying emerged after the cumulative drop of more than 6% in just two previous days of trading.
The U.S. benchmark, the West Texas Intermediate (WTI), settled below the $90 per barrel trading zone. The WTI ended Friday’s session trading $89.01, up 0.5%, on the day. It hit a six-month low of $87.03 earlier, a bottom not seen since the first of February 2022, when it went to as low as 86.55. Since the start of the Russian – Ukraine war, the WTI had never traded below $90. However, for the first week in August, the WTI is about 10% in the red, after back-to-back losses of more than 7% in July and June.
News continues after this ad
Recall, that the U.S. unemployment numbers reached a record high of 14.8% in April 2020, with the loss of approximately 20 million jobs after the COVID-19 breakout. Since then, hundreds of thousands of jobs have been added every month, with the trend not letting up in July despite the U.S. entering into a recession as it posted a negative 0.9% growth in second-quarter gross domestic product this year, its second consecutive GDP decline after a minus 1.6% in the first quarter.
Although the Biden administration and economic policymakers at the Federal Reserve can be thankful for the resilience in the job additions seen, however, the runaway labour market and associated wage pressures, have been a headache to monetary authorities fighting the worst U.S. inflation since the 1980s. In the U.S., hourly wages have risen month after month since April 2021, expanding by a cumulative 6.7% over the past 16 months, or an average of 0.4% a month. Inflation, measured by the Consumer Price Index, meanwhile expanded by 9.1% in the year to June, its highest in four decades. The Fed’s tolerance for inflation is a mere 2% per year, some 4-1/2 times less than the current CPI reading.
The Fed has already hiked interest rates four times since March 2022, bringing key lending rates from nearly 0% to as high as 2.5%. It has another three rate revisions left before the year is over, with the first of that due on September 21. Until the jobs report, released on Friday, expectations had been for a 50-basis point hike in September. Now, money market traders are pricing in a 62% chance of a 75-basis point hike for next month, the same as in June and July. Be that as it may, pump prices of U.S. gasoline, one of the main components of the CPI, have fallen from June record highs of above $5 a gallon to under $4 now, taking some measurable heat off the index.
The U.S. stock market has also struggled as the Fed raised rates. The benchmark S&P 500 for the top 500 U.S. stocks is down 13% on the year, after a 20% decline in June that put the index in bear-market territory. The U.S. dollar and Treasury bond yields, two asset classes that are usually the biggest beneficiaries of any Fed rate, took flight after the release of the job numbers. The Dollar Index, the measure of the strength of the U.S. dollar, hit a one-week high of 106.81. The benchmark 10-year Treasury note for yields hit a two-week high of 2.87%.
What you should know
For oil bulls, further strength in the dollar and yields and weakness in stocks could mean more losses in crude.
Charts show WTI risks falling to as low as $82, said Sunil Kumar Dixit, chief technical strategist at skcharting.com. Dixit further stated, “A break of the 50-week Exponential Moving Average of $93.16 exposes WTI to the horizontal support areas of $88, $85 and ultimately $82.”
Other analysts think there is a chance of WTI breaking even below $80 in the coming week. John Kilduff, partner at energy hedge fund Again Capital stated, “It all depends on the temperature that Fed officials set for September rates in their speaking engagements next week. Before this jobs data, the chance for a 100-basis point hike looked completely remote. Now, I wouldn’t say it’s that outlandish anymore.”