Oil Falls on Strong USD Ahead of Consumer Sentiment Data

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 fell in early trade Friday, with the U.S. dollar clawing back gains against its global peers as investors parsed cautious comments from key Federal Reserve officials after previously gauging softer U.S. inflation data would slow the aggressiveness in further rate increases.

This week's release of the Consumer Price Index showing a flat month-on-month reading for July and a pullback in factory gate prices tempered bets on another 75-basis point rate hike from the Federal Open Market Committee when it meets next on Sept. 20-21. However, San Francisco Federal Reserve Bank President Mary Daly warned on Thursday that the markets shouldn't be "head-faked" by a single data series, telling Bloomberg Television that she would be "open to 75 basis points should the data evolve differently."

Her comments followed a similar assessment from Minneapolis Federal Reserve Bank President Neel Kashkari, who told the Aspen Ideas Conference Wednesday that the central bank is "far, far away from declaring victory," and still sees the need of a federal funds rate approaching 4% by the end of the year.

U.S. Bureau of Labor Statistics reported on Thursday the producer price index for final demand decreased 0.5% from a month earlier while still rising 9.8% from a year ago. Excluding the volatile food and energy, the so-called core PPI rose 0.2% from June and 7.6% from a year earlier. Both the overall and core figures were softer than forecast. The data suggests wholesale inflation is beginning to ease, which could ultimately temper the pace of consumer price growth in coming months.

PPI followed July's softer-than-expected CPI reading after spiking 1.3%, bringing annualized rate of inflation from a 41-year high 9.1% to 8.7%, according to the BLS. A decline in gasoline prices, down 7.7% in July, offset increases in food and shelter costs, leading headline inflation to run at a cooler pace than markets had anticipated. Core prices, which exclude volatile food and energy categories, increased 0.3% from June, but are still at a slower pace than 0.7% rise in June from May.

Separately, six oil and gas fields in the Gulf of Mexico were shut-in Thursday after a leak at a Louisiana booster station halted two pipelines in the region. Shell confirmed its Mars and Amberjack pipelines, which together can move as much as 500,000 barrels per day (bpd) of oil from the Gulf of Mexico to the coast, were shut. That resulted in the closure of Shell's Mars, Ursa, and Olympus fields, as well as Chevron Corp.'s Malo, Tahiti and Big Foot fields, the companies said.

The outage comes at a time when global energy supplies are exceedingly tight. While U.S. commercial crude inventories have been cushioned by the government's tapping of emergency oil reserves, stocks nevertheless remain below the five-year average. Supplies could tighten further, with the International Energy Agency forecasting that oil demand will accelerate this year.

"Natural gas and electricity prices have soared to new record highs, incentivizing gas-to-oil switching in some countries," said the Paris-based energy watchdog in its August Oil Market Report released Thursday.

Gas-to-oil switching in power generation is likely to offset weakness in other sectors triggered by economic slowdown and a partial shutdown of industrial capacities across the European Union.

Similar sentiment was echoed in the Monthly Oil Market Report also released Thursday by OPEC economists that pointed to a trend of burning more crude in European power generation as one of the reasons for demand to remain strong this year. Despite this expectation, OPEC revised its demand projections downward from the previous month's assessment but still shows healthy growth of 3.1 million bpd this year and 2.7 million bpd in 2023. OPEC expects total oil demand to average around 100 million bpd in 2022. For 2023, the forecast for world oil demand growth remains unchanged at 2.7 million bpd.

In early trading, nearby-month delivery West Texas Intermediate fell about $1.50 to $92.80 barrel (bbl), and the ICE Brent contract for October delivery dropped $1.45 to $98.15 bbl. NYMEX September RBOB traded 4.95 cents lower to $3.0220 gallon, while the NYMEX September ULSD contract was flat near $3.4850 gallon.

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

Liubov Georges