Oil prices experienced an uptick in Asian trade on Friday, with the focus squarely on persistent supply disruptions in the Middle East. However, gains were somewhat tempered as the market awaited crucial U.S. payrolls data.
The Red Sea conflict witnessed heightened tensions this week as U.S.-led forces clashed with the Iran-aligned Houthi group in Yemen, and the Israel-Hamas conflict spilled over into Lebanon. Adding to supply concerns, Syria suspended production at its largest oilfield due to regional protests, taking approximately 300,000 barrels per day offline.
While disruptions in Middle East supplies contributed to a rebound in crude prices earlier in the week, the momentum was curtailed by data revealing a substantial build in U.S. oil product inventories in the final week of 2023. This data pointed to weak demand in the world’s largest fuel consumer, coupled with well-supplied local markets.
Brent oil futures expiring in March saw a 0.6% increase to $78.02 per barrel, while West Texas Intermediate crude futures rose 0.7% to $72.83 per barrel by 20:08 ET (01:08 GMT). Both contracts were poised to conclude the week about 1% higher, rebounding from significant losses in 2023.
A resurgence in the dollar exerted additional pressure on oil prices, as the greenback reached over three-week highs amid growing uncertainty about the Federal Reserve’s plans for interest rate cuts. While the Fed indicated an intent to cut interest rates in 2024, the absence of specifics regarding timing or scale led to traders slightly revising expectations, dialing back the anticipation of rate cuts starting as early as March 2024.
Market attention now shifts to the nonfarm payrolls data for December, scheduled for release later on Friday. This data is anticipated to provide insights into the trajectory of interest rates, given that the strength of the labor market is a pivotal factor for the Federal Reserve’s rate decisions.
The expectation of lower interest rates stimulating economic activity and potentially boosting oil demand later in 2024 is juxtaposed with the current scenario, where demand is expected to weaken. High lending rates continue to exert pressure on major global economies.
In addition to concerns over the macroeconomic environment, U.S. gasoline and distillates inventories both recorded significant growth in the week ending December 29, with increases of over 10 million barrels each. While overall inventories experienced a decrease of about 5 million barrels, analysts attribute this drawdown to the U.S. filling a supply deficit resulting from disruptions in the Middle East.
The noteworthy build in gasoline and distillates indicates subdued demand in the world’s largest fuel consumer. Factors contributing to this trend include both weak travel patterns during the winter season and U.S. production maintaining proximity to record highs, accompanied by an increase in exports.