Oil drops on weak US jobs data and Trump's tariffs

Trump's threats of secondary tariffs on Russian crude buyers seeks to pressure Moscow into ending Ukraine war

Some analysts believe US President Donald Trump's latest tariffs are again a negotiating gambit, with final levels 'unlikely to be close'. Reuters

Oil prices dropped on Friday after a weaker-than-expected US jobs report and tariffs announcements weighed on prospects for energy demand growth.

Brent, the benchmark for two-thirds of the world's oil, dropped 2.83 per cent to $69.67 a barrel at the market close on Friday, while West Texas Intermediate, the gauge that tracks US crude, fell 2.79 per cent to settle at $67.33 a barrel on Friday, its biggest drop in a single day since June 24.

A US jobs report on Friday put employment growth at a much lower level than expected. The Labour Department's employment report for July showed employers added 73,000 jobs. Markets had expected a gain of 100,000 jobs, but the figure fell short and was compounded by a downwards revision for May and June payrolls.

The unemployment rate ticked up to 4.2 per cent.

“This report is a major red flag,” Nigel Green, chief executive of global financial advisory deVere Group, said. “The headline miss is bad enough. But the real story is the scale of the revisions. The jobs market isn’t just slowing – it has been much weaker than anyone realised.”

The downwards revisions for May and June jobs is a signal for the Federal Reserve to take more action.

“This jobs report will likely be the turning point that tilts the balance decisively in favour of a September cut. That’s what markets are telling us. Policy is about to get looser,” Mr Green said.

The next Fed meeting is scheduled for mid-September, with one more jobs report due before then.

“The jobs market just gave the Fed a green light. They’re likely to take it,” Mr Green said.

Oil prices on Friday were also pressured by traders widely expecting that the Opec+ alliance will decide to boost supplies to the market during a meeting this weekend.

“Opec+ is set to increase production by 548,000 barrels per day in September, which could potentially weigh on prices,” Milad Azar, market analyst at XTB Mena, said.

The Opec+ alliance is expected to meet on August 3 to announce the return of additional barrels to the market from next month.

On Thursday, US President Donald Trump signed an executive order imposing “reciprocal tariffs” between 10 per cent to 41 per cent on dozens of countries.

Markets will keep a close eye on Mr Trump's tariffs and any retaliatory measures from its targeted trade partners, analysts said.

The President signed an executive order on Thursday that increased the rate on Canada to 35 per cent from 25 per cent, but an exemption for goods under the US-Mexico-Canada trade pact that includes oil remained in place.

“The focus for oil markets will likely remain on any tariffs fallout should countries look to retaliate against the US, and on any greater clarity on sanctions as US envoy Steve Witkoff is due to visit Russia,” Daniel Richards, Emirates NBD's Mena economist, said.

New level of clarity on US trade tariffs

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The US set levies of 39 per cent on Switzerland and 25 per cent on India. Among Middle East countries, Syria faces 41 per cent, and Iraq and Libya will pay 35 per cent and 30 per cent, respectively. For Jordan and Israel, the rate is 15 per cent.

“There is also still a view within the market that [US] tariffs are, once again, a negotiating gambit, with the 'final' levies unlikely to be close to these levels, as negotiations between the US and its trading partners continue,” Michael Brown, senior research strategist at Pepperstone, said.

Oil traders are also focused on Mr Trump's heightened pressure on Russia to reach a peace deal with Ukraine through the threat of secondary tariffs to be imposed on buyers of Russia crude, such as China and India, if Moscow does not reach a truce by the set deadline, Mr Brown said.

“Oil prices could remain under pressure over the medium to long term due to concerns about weaker global demand,” Joseph Dahrieh, managing principal at Tickmill, said.

“US tariffs have fuelled fears of a long-term impact on the global economy. Uncertainty around US-China trade talks could also remain an important source of risks, as the two largest oil-consuming nations could take a hit,” he said.

“If the economic slowdown materialises, the market could see new declines in prices. Tariffs are also expected to drive more inflation in the US, which could delay interest rate cuts, keeping borrowing costs elevated and slowing growth.”

The main topic that traders are watching this week is Mr Trump's threat to hit buyers of Russian oil with secondary tariffs, according to Giovanni Staunovo, a strategist at Swiss bank UBS.

“Supply disruption concerns supported crude prices. The tariffs news had only a modest negative impact on prices as the EU and China got either lower tariffs or are still negotiating,” he said.

Still, this is a market that is “vastly oversupplied”, thereby tilting the balance of risks firmly to the downside, and leaving any spikes vulnerable to being sold into relatively quickly, said Mr Brown.