Oil settles sharply higher on improved demand outlooks following US jobs report

New York — Crude oil futures settled at three-month highs June 5 amid improved demand outlooks following better-than-expected US economic data and declining drilling rig counts.

NYMEX July WTI settled $2.14 higher at $39.55/b and ICE August Brent was up $2.31 on the day at $42.30/b. Front-month WTI and Brent was last higher on March 6, the date that disagreement between Moscow and Riyadh led to the collapse of an OPEC+ production cut agreement.

US non-farm payrolls increased by 2.5 million jobs in May, the Department of Labor Bureau of Labor Statistics reported, far exceeding market expectations for a fall of a more than 7 million jobs. The increase pushed the nationwide unemployment rate down to 13.3%.

Oil prices moved sharply higher following the report on optimism that it signaled a sooner-than-expected return of oil demand.

"What you are going to see is many investors are now going to become much more optimistic about the US recovery," OANDA senior market analyst Edward Moya said. "With that in mind, we are probably going to see demand forecasts get upgraded a lot sooner than anyone was expecting."

NYMEX July RBOB settled up 6.46 cents at $1.2136/gal and July ULSD was up 7.65 cents from Thursday to settle at $1.1506/gal.

A continued decline in US drilling activity further added to upward price momentum. The closely watched Baker Hughes rig count fell for a 13th consecutive week, dipping 17 in the week ended June 5 to 284.

Falling US rig counts suggest that despite a rapid recovery in crude prices since early April, they remain too low for the majority of the US upstream to expand output.

While some low-cost producers began scaling back curtailments when WTI crossed above $30/b in late May, average breakeven costs are considerably higher. In the Permian Midland basin, for example, breakevens are around $41/b, according to S&P Global Platts Analytics data.

The slide in rig counts, and the implied lower future production, was bullish for forward dated crude prices. The contango in year-ahead WTI futures narrowed to $1.62/b, the weakest since March 5.

UNCERTAINTY OVER OPEC+ DEAL

The oil complex had been trending higher ahead of the US jobs report on expectations that the OPEC+ producer group will soon finalize a production cut extension.

The OPEC+ group is scheduled to meet June 6 via webinar to finalize what most members hope is a deal that would continue the collective 9.7 million b/d cuts through at least July.

OPEC will meet at 2:00 pm CEST (1200 GMT), and Russia and nine other allies will join the talks at 4:00 pm, OPEC announced June 5.

Without an extension, the 9.7 million b/d in cuts -- the largest coordinated supply accord in the market's history -- are set to roll back to 7.7 million b/d starting July 1 through the end of 2020.

The unexpectedly bullish US jobs report was unlikely to derail the hard fought for deal, Moya said, though a better-than-expected economic recovery could make future extensions less likely. However the corresponding rise in prices could incentivize stepped-up quota compliance issues, he added.

Mexico's President Andres Manuel Lopez Obrador, however, has declared that his country will not extend production cuts, having fulfilled its obligation to cut 100,000 b/d of its output for May and June.

Mexico had been the last holdout when the 23-country OPEC+ coalition hammered out its production agreement in April in the midst of an oil price crash, balking at a prescribed 400,000 b/d cut that it said would severely hamper its efforts to boost its oil industry as an engine for economic development.