Oil Price Forecast: Rallying on Strength of US Labor Market

Highlights

• Crude oil futures rise on strong US job market report
• Higher employment leads to demand for crude oil
• Set for third consecutive week of losses

Overview

U.S. West Texas Intermediate crude oil is trading higher on Friday after a stronger-than-expected U.S. labor market report dampened fears of a weakening U.S. economy. Nonetheless, the market is still poised for a third straight week of losses after the market registered a few dramatic plunges earlier in the week.

At 13:41 GMT, WTI crude oil is trading at $71.42, up $2.86 or +4.17%. The United States Oil Fund ETF (USO) is at $62.93, up $2.23 or +3.67%. The U.S. benchmark is set for a 7% loss for the week.

US Labor Market Data Beats Expectations

Nonfarm payrolls increased 253,000 for April, beating Wall Street estimates for growth of 180,000. The unemployment rate was 3.4% against an estimate for 3.6% and tied for the lowest level since 1969. Average hourly earnings rose 0.5% for the month and increased 4.4% from a year ago, both higher than expected.

Labor Strength Boosts Crude Oil Market

The reaction in the crude oil market is surprising since a strong job market will make it less likely for the Federal Reserve to halt its aggressive tightening campaign, a policy shift that many on Wall Street had been hoping for. Higher rates tend to drive up the greenback and consequently weigh on foreign demand for dollar-denominated crude oil.

However in this case, traders are responding to what the jobs market is telling us about the strength in the economy. They feel that high employment will mean strong demand for gasoline and consequently crude oil.

Technical Analysis

Technically, WTI Oil is trending lower, but short-term momentum may have shifted to the upside following the confirmation of yesterday’s reversal bottom.

Traders are trying to establish new higher support a $ 68.49 (S2). If successful, it could drive prices into $72.57 (S1). Since the trend is down, sellers are likely to come in on the first test of this area. Overcoming it, however, could trigger the start of an acceleration to the upside with $78.02 the next potential target.

On the downside, a failure to hold $68.49 (S2) will be a sign of weakness. This could be the trigger point for an acceleration into (S3) at $63.04.

Essentially, the near-term direction will be controlled by trader reaction to $68.49.