By Linh Tran, Market Analyst at XS.com
Yesterday, both WTI and Brent crude retreated from their session highs after U.S. crude oil inventories posted a sharp increase. At the same time, the market came under additional pressure from a rebound in the U.S. dollar following stronger-than-expected U.S. labor data.
WTI pulled back from its peak of USD 65.8 and is currently trading near USD 64.9, while Brent corrected from around USD 70.3 and, during the Asian session this morning, is trading near USD 69.3.
The report from the U.S. Energy Information Administration (EIA) showed a crude inventory build of +8.5 million barrels, far exceeding the forecast of -0.2 million barrels and reversing the previous reading of -3.5 million barrels. This sizeable build was significant enough to shift short-term market sentiment. A sharp increase in inventories, when the market had expected a slight draw, raised concerns that domestic demand may be slowing or that supply is rising faster than anticipated. After several sessions of recovery, this strong inventory build triggered notable profit-taking.
Pressure intensified further as the January U.S. Nonfarm Payrolls report showed job gains of 353,000, nearly double the consensus estimate of around 185,000. The unemployment rate held steady at 3.7%, while average hourly earnings rose 0.6% month-over-month, above expectations of 0.3%. These figures indicate that the U.S. labor market remains robust, reducing the likelihood of an early policy easing by the Federal Reserve.
Expectations that interest rates may remain higher for longer supported a rebound in the U.S. dollar and pushed Treasury yields slightly higher. As the USD strengthens, crude oil becomes more expensive for importing economies, thereby adding further short-term downside pressure.
In my view, for the remainder of this week, the market will continue to focus on upcoming key economic data, particularly the Consumer Price Index (CPI) and other activity indicators. If CPI remains elevated, the “higher for longer” rate narrative could be reinforced, allowing the USD to maintain its strength and making it difficult for oil to recover immediately. Instead, the current correction may extend further, with WTI potentially moving toward USD 63 and Brent retreating toward around USD 67 per barrel.
Conversely, if inflation shows signs of cooling, pressure on the USD may ease, helping stabilize the energy market. In that scenario, a renewed upside move in crude oil could be triggered, with short-term targets around USD 68 for WTI and USD 70 per barrel for Brent.
Overall, the current pullback in WTI and Brent reflects a combination of the +8.5 million barrel inventory shock and the macro repricing following the strong labor report. In the near term, oil price prospects will depend heavily on the trajectory of the U.S. dollar and upcoming U.S. economic data, as macro factors are clearly playing a more dominant role than the simple supply-demand narrative.