Oil Futures Gain as Demand Outlook Counters Inflation Worry

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- In early trading during the last session of the week, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange are again rallying on shortages of natural gas and coal supplies globally that could add 500,000 barrels per day (bpd) to global oil demand over the coming months, while accelerating inflation signals out of China, European Union, and the United States capped market upside ahead of the release of key economic data domestically.

China's producers price index rose 10.7% from a year earlier in September, according to the National Bureau of Statistics, the biggest rise since the agency started compiling the data in 1996. That follows a 9.5% increase in August and 9% hike in July, suggesting consistent inflationary pressures from rising commodity prices and production curbs.

Consumer inflation eased in September to 0.7% from 0.8% in August amid signs of weakening domestic demand and decline in volatile food prices. The divergence between the two inflation gauges presents a policy dilemma for Beijing that must balance propping up consumer demand against rising producer prices.

Domestically, there are signs a tightening labor market is putting upward pressure on wages, as employers try to hang onto current employees or bring in new staff, adding to immediate inflationary pressures in the broader economy. In the latest employment report, U.S. Labor Department said wages increased by an average 19 cents to $30.85 in September, following large gains in the prior five months. Meanwhile, job growth has slowed notably during that month to just 194,000 compared with at least 450,000 new jobs expected. U.S. consumer price index -- a gauge for inflation -- rose 5.4% in September from a year earlier, the same rate as in June and July, and slightly higher than in August. The so-called core price index, which excludes the often-volatile categories of food and energy, in September climbed 4% from a year earlier, the same rate as in August.

St. Louis Federal Reserve President James Bullard said in a recent interview that the case for inflation to dissipate over the next six months has weakened considerably, adding that current high levels of core CPI is "concerning."

His comments were echoed by Philadelphia Federal Reserve official Patrick Harker who suggested the central bank to start tapering its $120 billion a month in asset purchases as early as next month. Federal Open Market Committee will next meet on Nov. 2-3, with consensus among officials growing for the central bank to make its tapering announcement.

Next, investors will turn their attention to U.S. retail sales for September and consumer sentiment index from University of Michigan, scheduled for 8:30 a.m. ET and 10 a.m. ET releases, respectively.

Retail sales in September are seen to have fallen between 0.2% and 0.1% from an increase of 0.7% in August. Consumer sentiment is expected to edge higher in the final weeks of September from a multiyear low of 72.8 to a reading of 74. Both data points could provide a boost to the U.S. Dollar Index that weakened to a nine-day low at 93.760 on Thursday. The U.S. dollar firmed in early trading.

Near 7:45 a.m. ET, West Texas Intermediate November futures advanced $0.78 to trade just above $82 per barrel (bbl), and the international crude benchmark Brent contract for December delivery traded $0.88 higher at $84.90 bbl. NYMEX ULSD November contract advanced 2.96 cents to $2.5910 gallon, and front-month RBOB rallied 2.36 cents to $2.4586 gallon.

Oil futures were bolstered this week by across-the-board upgrades to global oil demand projections from the major forecasting agencies, with the International Energy Agency calling for fuel consumption to exceed pre-COVID levels early next year.

On Thursday, IEA said global oil consumption would grow 5.5 million bpd this year, up 170,000 bpd from their previous assessment, due to the energy crisis in the European Union and Asia. Next year, demand is seen growing by 3.3 million bpd to above pre-COVID levels of 99.6 million bpd.

"Record coal and gas prices as well as rolling blackouts are prompting the power sector and energy-intensive industries to turn to oil to keep the lights on and operations humming," said IEA in comments accompanying the forecast.

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

Liubov Georges