DTN Oil

WASHINGTON (DTN) -- Crude and refined products futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled Thursday's session mixed as market participants assess the risks soaring inflation could have on domestic fuel consumption and spending. Major forecasting agencies revised their demand expectations lower this year under pressure from surging energy prices in some of the world's fastest-growing economies.

Fuel consumption in China and India will likely take a big hit this year, according to economists from the Organization of the Petroleum Exporting Countries, bringing global oil demand expectations down 160,000 barrels per day (bpd) compared to last month's assessment. At 96.4 million bpd, worldwide oil consumption this year remains about 5% below the pre-pandemic levels despite expanding at a daily rate of 5.7 million barrels (bbl) this year.

An energy crunch that rippled through China's power sector combined with resurgent COVID-19 infections are seen cutting the country's fuel consumption by 200,000 bpd in October, with some of this slower momentum now projected to spill over into 2022. India's oil demand in the third quarter was also adjusted lower due to a slower recovery in demand for industrial fuels. In countries that are part of the Organization for Economic Cooperation and Development, oil demand estimates were also revised marginally lower as momentum in the economic recovery from the pandemic-caused contraction softened on the back of high energy prices and the region's downgraded economic outlook.

Traders are now weighing risks of higher inflation on global fuel consumption, with higher consumer prices in the United States and China seen accelerating in the months ahead. This week alone, the indices of producer prices in China and the U.S. registered rises of 13.5% and 8.6%, respectively. Some investors and policymakers alike were caught off guard by a 0.9% monthly increase in the U.S. consumer price index in October -- the highest in 30 years. Price increases were broad based, spreading well beyond parts of the economy that were most affected by the pandemic. Economists estimate domestic inflation could breach 7% by year end before gradually easing in mid-2022.

This scenario would likely prompt the U.S. Federal Reserve to conclude the tapering process of $120 billion of monthly bond-buying stimulus as early as first quarter 2022 -- about three months ahead of consensus. The Fed has already begun to back away from the narrative of "transitory inflation" in recent weeks, with a growing number of officials leaning toward raising interest rates next year instead of waiting until 2023. Wednesday's inflation data could accelerate the timetable.

In an op-ed published in the Financial Times this morning, Mohammed El-Erian -- a prominent economist and president of Queens' College in Cambridge, wrote: "Failure to act promptly would turn Fed's increasingly discredited "transitory" characterization from one of the worst inflation calls in history to a big policy mistake with widespread and unnecessary damage, particularly for the most vulnerable segments of the society."

This week, the U.S. Energy Information Administration revised higher its year-around forecast for domestic gasoline prices by 3 cents to $3 gallon. In October, U.S. gasoline retail prices averaged $3.29 gallon -- the highest monthly average since September 2014. EIA expects prices at the pump will maintain upward momentum into November, averaging $3.32 gallon.

On the session, NYMEX West Texas Intermediate futures for December delivery edged up $0.25 to $81.59 bbl and international crude benchmark Brent January futures added $0.23 to $82.87 bbl. NYMEX RBOB December futures advanced 2.06 cents to $2.3178 gallon and front-month NYMEX ULSD futures fell 0.5 cents for a $2.4471 gallon settlement.

Liubov Georges can be reached at liubov.georges@dtn.com