Oil Price Fundamental Daily Forecast – Strong US Dollar Could Weigh on Near-Term Demand

U.S. West Texas and international-benchmark Brent crude oil futures dropped to over three-week lows on Friday after strong U.S. jobs data raised concerns about higher interest rates, a hard recession and as investors looked for more clarity on the imminent European Union embargo on Russian refined products.

On Friday, April WTI crude oil settled at $73.74, down $2.46 or -3.23% and April Brent crude oil finished at $79.94, down $2.23 or -2.71%. The slightly stronger Brent futures contract hit its lowest level since Jan. 11 and the WTI futures contract fell to its lowest level since Jan. 5. The United States Oil Fund ETF (USO) closed at $64.41, down $2.16 or -3.25%.

Bearish Traders Fear Aggressive Fed Rate Hikes, Possible Hard Recession

Early Friday morning, the U.S. government reported that employment growth accelerated sharply in January, with 517,000 positions added, almost double the gain in December. The unemployment rate hit its lowest level since May 1969, coming in at 3.4%. Average Hourly Earnings were 0.3%, but the previous month was revised higher to 0.4%.

Not only did the data point to a persistently tight labor market, but it also supported the argument that the Fed might have to remain a little bit more aggressive going forward.

At the mid-session, financial market traders increased the odds for a 25-basis-point rate hike at the Fed’s March meeting. But they also changed their target of the U.S. central bank’s benchmark interest rate. They now see the Fed’s terminal rate peaking at 4.95% by June compared to 4.88% earlier.

Besides the potential for aggressive rate hikes, traders now believe the market is susceptible to a hard recession which could do some serious damage to crude oil demand. This comes just a few days after traders bet the Fed would be able to orchestrate a “soft-landing” by ending its aggressive rate hike campaign in March and perhaps cutting rates twice later in the year.

EU Agrees on Price Caps on Russian Refined Oil Products

European Union countries agreed to set price caps on Russian refined oil products to limit Moscow’s funds for its invasion of Ukraine, the Swedish presidency of the EU said on Friday.

EU diplomats said the price caps are $100 per barrel on products that trade at a premium to crude, principally diesel, and $45 per barrel for products that trade at a discount, such as fuel oil and naphtha. Ambassadors for the 27 EU countries agreed on the European Commission proposal, which will apply from Sunday.

Weekly Outlook

Traders will be keenly watching the U.S. Dollar, the impact of the new sanctions against Russia and the prospects of future demand from China for direction this week.

The new variable this week is the U.S. Dollar. Up until Friday’s robust U.S. jobs report, crude oil traders were betting on a weaker greenback to drive up demand for dollar-denominated crude oil.

Now that additional rate hikes from the Fed into at least June are back on the table, traders are again worried about a stronger U.S. Dollar weighing on foreign demand for crude oil.