Oil prices dropped on Thursday due to concerns about lower demand following weaker-than-expected U.S. employment and business data. Brent crude futures fell by 0.69% to $86.74 a barrel, while U.S. West Texas Intermediate (WTI) crude futures dropped by 0.75% to $83.25. The market was affected by the U.S. Independence Day holiday, leading to reduced activity.
Citi analysts noted that while geopolitical factors and weather pose bullish risks, the physical oil market is expected to weaken, especially as demand may soften in September due to potential hurricane risks. Additionally, U.S. crude shipments to Europe hit a two-year low in June, with European buyers choosing cheaper regional and West African oil. However, a rebound in volumes could occur in July and August.
Analysts also attribute the decline in oil prices to traders cashing in on recent gains. Despite the drop, oil futures in both the U.S. and Europe are on track for a fourth consecutive weekly increase. OANDA senior market analyst Kelvin Wong mentioned that the intraday weakness in oil prices could be indicative of profit-taking activities, although WTI crude managed to hold above the key minor support level of $81.90 per barrel. The lower demand expectations were reinforced by U.S. data indicating an increase in first-time applications for unemployment benefits and a rise in the number of people on jobless rolls to a 2-1/2-year high. The ADP Employment report also showed a smaller increase in private payrolls than expected, and the ISM Non-Manufacturing index fell to a four-year low in June.
However, analysts believe that weaker economic data may lead the U.S. Federal Reserve to consider cutting rates, which could be supportive for oil markets as lower rates may boost demand. This expectation has led to an increase in the probability of a September rate cut and a decrease in the strength of the dollar. Additionally, U.S. crude and fuel stockpiles were reported to have fallen more than expected last week, according to the Energy Information Administration.