By Barani Krishnan
Investing.com – The cuts mantra is back.
Seizing on speculation that forthcoming U.S. tariffs on Mexico may not be that bad after all, the Saudis produced a more than 2% rally in oil on Friday by talking up OPEC’s plans to extend production cuts through the rest of the year.
Speculation of another kind of cut also boosted oil: expectations the Federal Reserve will cut rates to keep the U.S. economy chugging along after data on Friday showed smaller-than-expected U.S. jobs and wage inflation growth in May.
U.S. West Texas Intermediate settled up $1.41, or 2.7%, at $54 per barrel, extending Thursday’s surprise jump of 1.7%.
Brent, the U.K.-traded global benchmark for oil, closed up $1.66, or 2.7%, at $63.33 a barrel. Like WTI, Brent also gained 1.7% in the previous session.
Wall Street’s key stock indexes rose by more than 1% each after a Labor Department report showed non-farm payrolls increased by 75,000 jobs in May, much smaller than the 185,000 additions expected according to forecasts compiled by Investing.com.
That suggested that the loss of momentum in economic activity was spreading to the labor market and could prompt the Fed to cut rates. A rate cut normally weakens the dollar and boosts demand for commodities such as oil from buyers holding other currencies.
It has been a volatile week for oil, with WTI ending the week up almost 1% while Brent fell nearly 2%.
The U.S. crude benchmark sunk to early January lows of $50.62 on Wednesday, while its U.K. peer hit five-month lows of $59.45 on worries about a global recession from the Trump administration’s trade wars with China and Mexico and bearish weekly supply-demand numbers for U.S. oil.
But a Bloomberg headline late on Thursday that the U.S. was considering delaying the first 5% tariff on Mexican imports due from Monday set off comeback rallies for both WTI and Brent.
White House Press Secretary Sarah Sanders, however, denied in an e-mail that the tariffs were being withheld. There was also breaking news late on Thursday that the Trump administration was planning to declare a new national emergency in order to implement sweeping tariffs on Mexico over the flow of Central American migrants to the U.S.
Yet, the rebound in oil persisted.
“The general thinking is we got a little oversold on oil this week, the trade war fears and weak supply-demand for oil notwithstanding,” said John Kilduff, founding partner at New York energy hedge fund Again Capital.
“Yet, there’s very good possibility this feel-good sentiment might not last beyond a week if oil stats continue showing weakness, regardless what the Saudis say,” Kilduff said.
Saudi Energy Minister Khalid al-Falih said on Friday that OPEC was close to agreeing to extend a pact on cutting oil supplies beyond June, although more talks were still needed with non-OPEC countries that were part of the production deal.
Falih, who spoke at an economic forum in St. Petersburg, Russia, said OPEC and its allies should extend oil production cuts at around current levels as Riyadh did not want a fight for market share with the United States or a repeat of the crude price collapse from five years ago.
Falih said Saudi Arabia has cut supply by more than required by the OPEC+ deal in a bid to stop inventories building up. The kingdom was pumping 700,000 barrels per day below its 10.311 million bpd target, implying output of about 9.60 million bpd.
Supply-demand for U.S. oil had been dismal lately.
Crude stockpiles jumped nearly 7 million barrels last week, versus an expected draw of 850,000, the U.S. Energy Information Administration reported on Wednesday.
U.S. gasoline inventories surged by 3.21 million barrels last week, compared to expectations for a gain of just 630,000 barrels, the EIA said. U.S. distillate stockpiles, meanwhile, rose by 4.57 million barrels, against a forecast for 500,000.