Oil Slides Ahead of US Inflation Data, Inventory Report

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange moved lower early Wednesday after the American Petroleum Institute late Tuesday reported large builds in domestic crude and distillate inventories during the first week of August, fueling concerns over weak demand this summer. In addition, investors await the release of closely watched inflation data in the United States that is expected to show the first month-on-month decrease in the headline inflation since April, easing pressure on the Federal Reserve.

Economists expect annualized rate of inflation in the U.S. to have decelerated from 9.1% in June to 8.7%, bringing monthly increase to 0.2%, which would be the smallest monthly gain since January 2021. Gasoline prices likely brought notable relief for headline inflation, with global supply chain pressures further easing from the spring lockdown across China. What's more, core inflation, excluding volatile food and energy prices, is seen to have fallen to 0.5% month-on-month, which should suggest inflation in the broader economy has peaked. U.S. Bureau of Labor Statistics will release the July consumer price index at 8:30 a.m. EDT.

A slight decline in headline inflation in July could fuel speculation that the Federal Reserve will raise interest rates by only 50 basis points at its next meeting in September, less than the last two decisions that saw an increase of 75 basis points each.

The CME Group's FedWatch is pricing in a 66.5% chance of a 75-basis point Fed rate hike in September, which would take its target federal funds rate to between 3% and 3.25%, with the bulk of expectation pointing to a range of between 3.5% and 3.75% by the end of the year.

Heading into the data's release, U.S. equity futures edged higher and the U.S. Dollar Index lost some ground against its global peers to trade below 106 but failed to lend support for the oil complex in early trading. Nearby-month delivery West Texas Intermediate dropped $1.56 to $88.91 barrel (bbl), and the ICE Brent contract for October delivery declined $1.69 to $94.62 bbl. NYMEX September RBOB fell 2.93 cents to $2.9399 gallon, while NYMEX September ULSD contract pulled back 7.83 cents to $3.2539 gallon.

Separately, API reported Tuesday afternoon that commercial crude oil stocks rose 2.156 million bbl last week, well above calls for a 200,000 bbl increase. If confirmed by U.S. Energy Information Administration data Wednesday morning, this would be the second consecutive weekly build in domestic crude oil inventories. Stocks at the Cushing, Oklahoma, tank farm, the New York Mercantile Exchange delivery point for WTI futures, also rose 910,000 bbl. Gasoline stocks fell 627,000 bbl in the week reviewed compared with estimates for a 500,000 bbl downturn. API data show distillate inventories rose 1.376 million bbl as of Aug. 5, missing calls for a draw of 500,000 bbl.

Further weighing on the complex, EIA on Tuesday forecast global oil demand would rise by 2.08 million barrels per day (bpd) this year, down from a 2.23 million bpd growth rate seen in its previous forecast, to 99.43 million bpd. The downward revision was mostly attributed to consumption weakness in Organization for Economic Cooperation and Development industrialized countries.

"Although supply disruptions have kept crude oil prices around $100 a barrel, crude oil prices have come down slightly in July as concerns of slower economic growth or a recession become more prevalent," said EIA its monthly Short-term Energy Outlook.

These concerns are reflected in the University of Michigan's survey of consumer sentiment, which recorded its lowest reading on record in June, with data going back to November 1952. Likewise, consumer sentiment in the Euro Area has decreased, reaching record lows in July.

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

Liubov Georges