By Barani Krishnan
Investing.com -- Those who were short covered, and longs added to their positions. But crude markets still could not avert a weekly loss — their third in four — on worries over aggressive Federal Reserve rate hikes and the impact that could have on the U.S. economy and its demand for energy.
London-traded Brent crude settled Friday’s trade up $2.37, or 2.3%, at $107.02 a barrel, adding to the previous session’s near $4 or 4% gain.
The rebound wasn’t enough to cover Brent’s 12% plunge between Tuesday and Wednesday, which still left the global crude benchmark nursing a 4% loss on the week. New York-traded West Texas Intermediate, or WTI, crude settled up $2.06, or 2%, at $104.79 a barrel. Like Brent, WTI also tacked on some $4 or 4% in the previous session. Despite those gains, the U.S. crude benchmark dipped 3% on the week.
Friday’s rebound in oil came after the Labor Department reported that US employers added 372,000 jobs in June — some 100,000 more than economists’ expectations — while keeping the jobless rate at 3.6% for a third straight month.
There is a close nexus between oil prices and U.S. jobs data. In the most simple sense, people need to commute to work — at least for those who don’t work remotely — and they need to either drive or rely on public transport. Whatever the mode that’s used, oil is needed for that.
Also, when jobs and wages are good — as they have been for some time — Americans literally go the extra mile in discretionary travel, i.e. with road trips and flights to far-away holiday destinations. U.S. pump prices for gasoline, stubbornly at north of $4.50 per gallon, have not demonstrated much evidence of demand destruction thus far.
Sterling jobs and wage numbers, however, pose a different problem now for the economy and the Fed.
The two have been identified as among the reasons for runaway inflation in the United States as employment security and higher disposable income allows Americans to pay more for everything. US inflation has been persistently running at four-decade highs since late last year, with the closely-watched Consumer Price Index growing at an annualized rate of 8.6% as of May. The Fed’s tolerance for inflation is a mere 2% a year and it has vowed to raise interest rates as much as necessary to achieve that.
Economists say the Fed kept rates “too low for too long” and its attempts at catch-up now could unravel recovery made since last year from the coronavirus pandemic. The central bank risks also pushing the United States into a recession in its fight to bring ramping inflation under control, they say.
The drone of recession talk has gotten louder across America since the Atlanta division of the Federal Reserve, or Fed, forecast a 1.0% contraction in second quarter gross domestic product, or GDP. Officially, the Commerce Department reported a 1.6% GDP decline for the first quarter. Typically, an economy is considered to be in recession if there are two straight quarters of GDP decline.
Analysts say Brent’s $11 move down on Tuesday alone — the third-biggest absolute drop since the crude benchmark began trading 34 years ago — was likely exacerbated by margin calls and thin liquidity as U.S. traders returned from the long July 4th holiday weekend and were forced into catch-up mode to news of global economic gloom.
Even so, the threat of a recession could not be underplayed, they said.
“The sharp correction in Brent crude of late, from an intraday high of over $120/b on June 29 to a low under $100/b yesterday, reflects softening sentiment as fears of a recession grow rather than fundamental changes in the physical market,” said Stephen Innes of SPI Asset Management.