Oil prices fell on Thursday, with investors turning cautious on expectations of lower demand as U.S. employment and business data came in weaker than forecast, signaling the economy of the world’s top oil consumer may be cooling.
Brent crude futures were down 48 cents, or 0.55 percent, at $86.86 a barrel, while U.S. West Texas Intermediate (WTI) crude futures fell 51 cents, or 0.62 percent, to $83.36 by 0342 GMT, with activity thinned by the U.S. Independence Day holiday.
Softer physical market outlook
Citi analysts noted in a client note that “Geopolitics and weather remain bullish risks, but the underlying physical market strength looks set to turn softer.” They added that physical markets are trading post-summer September cargoes when demand could soften partly due to hurricane risks.
Decline in U.S. crude exports to Europe
U.S. crude shipments bound for Europe fell to a two-year low in June as European buyers bought cheaper regional and West African oil, though some rebound in purchases in July and August could still happen.
Weakening U.S. labor market indicators
Data in the United States on Wednesday underscored the lower demand expectations. First-time applications for U.S. unemployment benefits increased last week, while the number of people on jobless rolls rose further to a 2-1/2-year high towards the end of June. Additionally, the ADP Employment report showed private payrolls increased by 150,000 jobs in June, below a consensus predicting an increase of 160,000, and after rising by 157,000 in May.
Slowdown in U.S. services sector activity
Further signs of a loss of momentum in the economy were evident in the ISM Non-Manufacturing index, a measure of U.S. services sector activity, which fell to a four-year low of 48.8 in June, well below the 52.5 consensus, amid a sharp drop in orders.
Potential Fed rate cuts could support oil prices
However, analysts noted that weaker economic data may add to the Federal Reserve‘s arguments to start cutting rates, a move that would be supportive for the oil markets as lower rates could boost demand. As ANZ Research analysts said in a note, “The direction of recent data conforms to the Fed’s easing bias. A slowdown in growth momentum will support disinflationary impulses in coming months, paving the way for the Fed to cut rates.”
Capping price weakness, U.S. crude and fuel stockpiles all fell by more than expected in the week ending June 28, the Energy Information Administration said on Wednesday.
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