By Giulia Petroni
Here's a look at what happened in oil markets in the week of April 29-May 3 and what will be in focus in the days to come.
OVERVIEW: Oil prices are on track for loss this week after dropping to levels last seen in mid-March as fresh hopes for a ceasefire deal between Israel and Hamas, a weekly build in U.S. crude inventories and lack of further progress on inflation weigh on sentiment. Brent crude currently trades around $84 a barrel, while West Texas Intermediate is at around $79 a barrel.
MACRO: As expected, U.S. Federal Reserve officials kept interest rates unchanged--the highest level in decades--at the end of their two-day meeting this week, following a run of economic data that revealed stubborn inflationary pressures.
The U.S. central bank flagged a lack of further progress toward its 2% inflation target, but also signaled it was more likely to keep rates at their current level for longer than raise them again. The timing of cuts remains unclear, bringing some headwinds to oil as higher-for-longer rates typically dampen demand for the commodity.
The Fed also announced plans to slow the speed of its balance sheet drawdown starting from June. The act of reducing its own balance sheet, a policy referred to as quantitative tightening, consists in the selling off of the central bank's assets to decrease money supply and increase interest rates.
Meanwhile, U.S. employers added a seasonally adjusted 175,000 jobs in April, according to the Labor Department. The figure is below what economists had expected and far lower than in March, when gains exceeded 300,000. The unemployment rate ticked up to 3.9% from 3.8% in March.
The employment cost index--a closely watched metric of labor measuring wages and benefits--increased faster than expected by 1.2% last quarter. The figure is closely monitored by the Fed, as accelerated compensation growth could add pressure to inflation. Also, the latest U.S. jobless claims data pointed to labor market strength, as the number of Americans applying for unemployment benefits was lower than expected at 208,000 last week.
GEOPOLITICAL RISKS: News of fresh talks between Israel and Hamas over a potential ceasefire and hostage deal in Gaza pushed prices lower this week. According to Egyptian officials, Israel has given Hamas a week to agree to the terms of the new deal, or it will begin military operations in the southern city of Rafah despite international pressures.
Tensions in the region remain high, with Turkey saying it was suspending all trade with Israel until an uninterrupted flow of humanitarian aid is allowed into Gaza, and the U.S. repositioning its military assets in the Middle East after the U.A.E. said it would no longer permit American warplanes and drones based at the Al Dhafra air base in Abu Dhabi to carry out strikes in Yemen and Iraq.
Meanwhile, the U.S. and Saudi Arabia are reportedly close to a historic defense treaty that could potentially lay out a pathway to diplomatic ties with Israel, provided that the conflict in Gaza ends.
DEMAND: This week's inventory report from the Energy Information Administration was bearish for oil, adding further downward pressure to prices. Surprisingly, commercial crude oil stocks rose by 7.3 million barrels last week as exports fell and refineries reduced their capacity use.
In China, the latest data showed factory activity continued growing but lost some steam due to persistent economic headwinds, as the official manufacturing purchasing managers index expanded for a second straight month in April, but at a slower pace.
WHAT'S AHEAD: Geopolitical developments in the Middle East are expected to be a key area of focus, likely determining whether the oil price's downward trend continues next week. According to market watchers, a reduced geopolitical risk premium due to easing tensions in the region capped upsides on oil prices, but risks are still high.
Investors will also be focusing on China's trade balance figures due on Thursday, with analysts saying that a continued recovery in crude imports should send positive signals to the market as the country remains a key driver of demand trends this year.
Meanwhile, the U.S. Energy Information Administration is set to publish its monthly report on Tuesday. According to analysts, the estimates for U.S. production will be in focus, but the report isn't likely to bring any major changes or spark price moves. The weekly inventory report is instead expected to be in greater focus for cues on the demand outlook.
Write to Giulia Petroni at giulia.petroni@wsj.com
(END) Dow Jones Newswires
05-03-24 1106ET
