Oil prices cut back gains of over a dollar on Friday after stronger-than-expected U.S. jobs data indicated the improving economic recovery of the world's largest oil importer was firmly on track, boosting the dollar.
Although a stronger recovery should lead to increased demand for crude, the data sent the dollar higher amid expectations the U.S. may move away from its current ultra-loose monetary policy which tends to benefit riskier assets like commodities.
A stronger dollar can also weaken dollar-denominated oil prices because it increases the price of oil for consumers using other currencies.
U.S. crude futures were 17 cents higher at $106.89 at 1333 GMT after earlier climbing to $107.84, a level last touched in September 2008. Brent crude for May delivery rose 2 cents to $117.38, the highest level in nearly four weeks.
There are two opposing factors here, said Thorbjoern Jensen, analyst at Global Risk Management. This data should be bullish for oil but the dollar effect and the rate effect is taking the steam out of it.
Payrolls showed a total of 216,000 nonfarm U.S. jobs were added in March, the government said, well above the 190,000 expected in a Reuters poll.
A growing economy will encourage Federal Reserve chairman Ben Bernanke to shift his focus toward inflation, increasing the potential for an interest rate hike which would further strengthen the dollar.
John Kilduff, partner at Again Capital LLC in New York, said the mixed reaction to the data was unsurprising.
Crude may not react very much to the improving employment data, as the reading may stabilize the dollar and allow the Federal Reserve to further signal a pullback from its aggressively loose monetary policy, he said.
While increased employment should help energy demand, there are greater forces at work in the commodity sector.
LIBYA, MIDDLE EAST TURMOIL
Fighting in Libya, where Muammar Gaddafi's forces appear to have regained the upper hand, supported crude prices as the prospect of a drawn-out conflict reduced expectations of lost Libyan oil returning to the market in the near future.
On Friday, as government forces pounded the city of Misrata in the west, a rebel official detailed how Qatar will provide fuel, medicine, food and other humanitarian needs as part of a deal to market oil from the rebel-held east.
But analysts warned it was doubtful Libyan crude would reach world markets on a sustained basis because of the risk of loading cargoes and said recent advances by government troops were bullish for oil prices.
Further supply disruption came from Gabon, which produces between 220,000 and 240,000 barrels a day, where striking workers are shutting half the central African nation's crude oil output on Friday and plan to halt the remaining output within 48 hours.
Bahrain has stepped up arrests of cyber activists and Shi'ites and protests broke out in three Syrian cities against Baath Party rule after Friday prayers, a favored time for demonstrations in the Middle East.
(Additional reporting by Alejandro Barbajosa and Robert Gibbons; editing by Keiron Henderson)