Oil sheds initial gains, plunges $1 after US employment data offsets crude draw; Brent drops to $76/bbl

Global crude oil prices gave up initial gains clocked earlier in the session and plunged over $1 per barrel on Wednesday, August 21, shortly after the US government revised significantly lower the number of jobs added in the year to March in the world's largest economy. This pressured investor sentiment and offset the momentum that oil picked up with the US crude oil stock data.

Brent crude futures were last down $1.04, or 1.35 per cent, at $76.16 per barrel, while US West Texas Intermediate crude futures were down $1.15 or 1.15 per cent at $72.02. Regarding domestic prices, crude oil futures were last trading 1.75 per cent lower at ₹6,046 per barrel on the multi-commodity exchange (MCX).

Also Read: Oil prices hover near two-week low over easing MidEast tensions, weak China data; Brent at $77/bbl

What's weighing on crude oil?

-US employers added far fewer jobs than originally reported in the year through March, the Labor Department said on Wednesday. The department's estimate for total payroll employment from April 2023 to March 2024 was lowered by 818,000.

-Analysts said the market is now going from pricing in a stronger economy to a potential hard landing, so oil prices are reluctant to move higher. The revised job data of the US offset support from a drop in US oil inventories.

-US crude stocks, gasoline and distillate inventories fell in the week ending August 16, the Energy Information Administration (EIA) said on Wednesday. The EIA said crude inventories fell by 4.6 million barrels to 426 million weekly.

-Investors' worries persisted over the prospect of China's economic weakness weighing on the country's crude demand. China's economic struggles have contributed to weak processing margins and low fuel demand, curbing operations at state-run and independent refineries.

Also Read: OPEC+ sticks to output policy of 5.86 million barrel pullback per day, hints at unwinding cuts from October

-Analysts are currently measuring everything by the Chinese economy, and if anything is leaning negatively out of China, it will pressure energy. Elsewhere, the UK maritime agency said a Greek-flagged oil tanker was adrift in the Red Sea after repeated attacks that started a fire on the vessel and caused the ship to lose power.

-Iran-aligned Houthi militants have launched a series of attacks on international shipping near Yemen since last November in solidarity with Palestinians in the war between Israel and Hamas. The Red Sea, leading to the Suez Canal, is a key shipping route for oil, and sustained attacks pose a potential threat to global crude flows.

-Meanwhile, US Secretary of State Antony Blinken wrapped up a Middle East trip on which he had intended to broker a ceasefire agreement in Gaza. Blinken and mediators from Egypt and Qatar have raised hopes of a US "bridging proposal" that could shrink the gaps between the two sides in the 10-month war.

-Analysts added that hopes of a ceasefire between Israel and Hamas have weighed on oil and lingering demand concerns. Israeli airstrikes across Gaza have killed at least 50 Palestinians in the past 24 hours, Palestinian health authorities said, as the military said troops continued to target militants and seize weapons and ammunition.

Also Read: Jackson Hole: US Fed chair Jerome Powell to shift focus on labour vs inflation, signal rate cut trajectory for 2024

Where are prices headed?

Analysts said oil futures are trading positively after overnight data from US API showed a drawdown in gasoline and distillate inventories. US Fed rate cut indications may also impact crude oil prices' near-term trajectory.

‘’The upside looks limited due to the rise in crude stocks, the expectation of higher supply from the OPEC region, and easing Middle-East tensions. On charts... trend looks sideways with resistance at 6,250, while on the downside support holds at 6,000/ 5,900,'' said Pranav Mer, Vice President, EBG - Commodity & Currency Research, JM Financial Services Ltd.

Rahul Kalantri, VP of Commodities, Mehta Equities Ltd, said that the lacklustre demand from China is pressurizing crude oil prices. ‘’We expect crude oil prices to remain volatile. Crude oil has support at $72.40-71.80, and resistance is at $73.60-74.50 in today’s session. In INR crude oil has support at ₹6,080-6,010 while resistance at ₹6,210-6,280,'' said Kalantri.