DTN Oil

WASHINGTON (DTN) -- Nearby delivery month oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell 3% or more on Wednesday, sending front-month West Texas Intermediate towards $81 barrel (bbl) amid a resurgence of buying interest in the U.S. Dollar Index triggered by higher-than-expected print on domestic inflation for last month, fueling fears that inflation could prove stickier than the U.S. Federal Reserve previously projected.

At settlement, NYMEX WTI futures for December delivery plummeted $2.81 or 3.54% to $81.34 bbl, with losses accelerating post-settlement, and the international crude benchmark Brent January futures contract eroded $2.14 for a $82.64 bbl settlement. NYMEX RBOB December futures plunged 7.8 cents to $2.2972 gallon and front-month NYMEX ULSD futures declined 5.6 cents to $2.4521 gallon.

The U.S. dollar surged against major peers Wednesday, settling at a 17-month high 94.838 after the U.S. Labor Department reported consumer prices last month rose to their highest rate since 1990. The U.S. consumer price index -- a measure of inflation -- spiked 6.2% in the 12 months ending in October, far above median expectations for a 5.8% year-on-year increase. Alarmingly, consumer prices accelerated gains across various categories including shelter, energy, food, used and new cars, suggesting inflationary price pressures across the economy are broad based.

Markets appear to have priced in more aggressive Federal Reserve rate hikes for next year as a result of this data. Last week, Fed officials took a first step in normalizing monetary policy by slowing down the pace of $120 billion a month in bond-buying stimulus -- a measure seen cooling off long-term demand.

Ahead of Wednesday's CPI release, Federal Reserve Vice Chairman Richard Clarida conceded this week that inflation is running "much more than a moderate overshoot" of the central bank's 2% target, adding that the repeat of inflation next year "would not be considered a policy success."

Further weighing on the oil complex, U.S. crude oil inventories increased for the third consecutive week through Nov. 5, reported the Energy Information Administration Wednesday morning, easing concerns over tightening global oil market. Crude stockpiles rose by 1 million bbl from the previous week to 435.1 million bbl and are now about 6% below the five-year average. Build was realized even as domestic refiners hiked run rates and domestic production remained near a pre-pandemic high of 11.5 million barrels per day (bpd).

U.S. gasoline demand, meanwhile, fell 254,000 bpd or 2.5% from the previous week to 9.259 million bpd, suggesting consumers might be pulling back on gasoline purchases amid soaring prices. Earlier this week, EIA lifted its 2021 retail gasoline prices forecast by 3 cents to $3 gallon, with full-year gasoline consumption seen at 8.78 million bpd.

"Rapidly increasing crude oil prices typically reduce product crack spreads, but low inventories are supporting crack spreads," said EIA. "Gasoline inventory draws were relatively large in September, which likely reflects a combination of less refinery production throughout 2021 than in recent years and higher gasoline demand compared with earlier in 2021."

EIA estimates total gasoline inventories fell 11.4 million bbl in October, which was a larger inventory draw than the five-year average and has also resulted in pressing inventory levels to near the five-year low.

Bullish parts in the EIA report could be found in distillate fuels, showing demand for middle of barrel fuels surged 594,000 bpd last week to 4.28 million bpd -- directionally in line with a 3.1% weekly increase seen in DTN Refined Fuels Demand data. Diesel consumption in the United States was up 7.1% relative to the same week in 2019 last week, strengthening further on a relative seasonal basis after being up 4.4% compared to 2019 levels, according to DTN data.

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