Oil Futures Mixed as Inflation Slow China's Factory Output

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange were shallowly mixed early Monday, with the crude contracts lower and products little changed as Colonial Pipeline makes deliveries along its Texas-to-New Jersey pipeline network while higher raw material costs and supply chain constraints slow growth in factory output in China.

The National Bureau of Statistics of China overnight said industrial production grew 9.8% year-on-year in April that while strong downshifted from March's 14.1% annual growth rate. Slower factory output last month coincided with a 2.4% increase in producer prices for industrial products to 6.8% year-on-year, while producer prices for oil and gas extraction spiked 85.8% annually, and mining and metals processing were up 38.3% and 30% on the year, respectively.

In releasing the data, the statistical division said, "we must be aware that the global situation of the epidemic is still complicated, and the world's economic recovery is unbalanced. At home, the foundation for the economic recovery is not yet solid and new circumstances and problems have emerged in the development."

Inflation fears roared in the United States in April, with core inflation up 3% from year ago, while retail sales last month were flat against March, missing expectations for a 1% monthly gain. U.S. retail sales were still strong in April at $619.1 billion, according to the U.S. Commerce Department. In March, retail sales spiked 10.7% following direct stimulus payments to most Americans.

Inflation concerns, which weaken purchasing power, triggered an unexpected 6.2% decline in U.S. consumer sentiment index, with the University of Michigan's survey of consumers reporting an 82.8 reading compared with projections for an increase to 90.3.

"The average of net price mentions for buying conditions for homes, vehicles, and household durables were more negative than any time since the end of the last inflationary era in 1980," said Richard Curtin, chief economist of the survey.

The data sparked selling in the U.S. Dollar Index on Friday which rallied oil futures, with the U.S. dollar continuing to soften early Monday, trading near 90.3.

Federal Reserve officials have indicated on multiple occasions current inflation is transitory, owing to pent-up demand due to the pandemic, with no expectations to adjust monetary policy. Previously, Federal Reserve Jerome Powell stated the central bank would tolerate inflation above its 2% target for a longer period in order to spur employment. The Powell "put," in reference to former Fed Chair Alan Greenspan's policy of holding interest rates low despite accelerating economic growth, have supported equities and commodities in early 2021. However, an increase in the national U3 official unemployment rate from 6% to 6.2% in April and against expectations for a decline have prompted speculation the central bank would need to lift the federal funds rate above its near zero rate sooner than expected or risk an overheated economy. Minutes of the April 27-28 Federal Open Market Committee are to be released Wednesday afternoon.

Mixed early trading also follows the Colonial Pipeline's full restart late last week after a May 7 ransomware attack forced the operator to fully shut the 2.5 million barrels per day (bpd) refined fuels pipeline, prompting supply runouts at terminals along its 5,500-mile route. The outage, joined by social media frenzy, triggered panic buying that led to outages at the majority of retail gas stations in the U.S. southeast. The outages are being cured with less than two weeks until the Memorial Day weekend, when driving demand typically ticks higher on holiday travel.

In early trading, NYMEX June West Texas Intermediate futures were down $0.25 near $65.10 per barrel (bbl) ahead of June WTI options expiry Monday afternoon, with the July contract trading at parity. ICE July Brent futures were also down $0.25 at $68.50 bbl. NYMEX June RBOB futures were flat near $2.1220 gallon, with June ULSD futures also little changed near $2.0350 gallon.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne