- US private payrolls fell to a 4-month low in May, rising by only 152,000.
- The US released the ISM Services PMI report, which revealed expansion in the sector.
- Figures from the EIA revealed an unexpected jump in crude inventories.
Oil prices rose 1% on Wednesday as Fed rate cut optimism overshadowed an unexpected increase in crude inventories. However, prices had dropped in the previous sessions as inventors worried about looming oversupply in the market.
US private payrolls (Source: ADP Research Institute)
On Wednesday, Federal Reserve rate cut expectations increased after a poor US employment report. Private payrolls fell to a 4-month low in May, rising by only 152,000. This is well below the average of 194,000 reported over the past year and shows weakness in the labor market. However, the more critical employment report will come on Friday, which will shape the outlook for US rate cuts.
Forecasts show an increase of 186,000 jobs in May. This would be a slight improvement from the previous month when the country added 175,000 jobs. A lower-than-expected number would lead to a rally in oil prices as it would bolster expectations for an interest rate cut in September.
Apart from employment, the US also released the PMI report for ISM services, which revealed expansion in the sector. This followed previous data showing a contraction in the manufacturing sector. Although it was an upbeat report, it had little impact on rate cut expectations.
Notably, investors were more optimistic when a Reuters poll showed that economists expect the Fed to cut rates twice this year, with the first cut in September. Futures markets have also increased bets for lower interest rates this year. Moreover, the chances of a cut in September rose to 69%. However, economists believe there is still a risk that the Fed will cut only once or not at all, depending on incoming data.
Meanwhile, figures from the EIA revealed an unexpected jump in crude inventories. Stocks rose by 1.2 million barrels last week when analysts had expected a decline of 2.3 million barrels. The numbers signaled weak demand at the start of the US summer driving season when consumption should ideally be increasing.
Oil prices recovered on Wednesday after five consecutive sessions of declines caused by supply concerns. Despite weak demand, OPEC+ plans to increase supply by unwinding its output cuts in Q4. However, some officials pointed out this exercise would not occur if demand remained weak.
