Oil Pares Gains as Inflation Seen Sapping Demand Growth

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 settled Thursday's session mixed, with West Texas Intermediate sliding below $90 barrel (bbl) after government data showed consumer prices in the United States increased at the fastest rate in over 40 years last month, raising the potential for a more aggressive policy response from the Federal Reserve that could speed up a series of interest-rate increases this spring to ease surging prices and cool the economy.

The U.S. Bureau of Labor Statistics on Thursday reported U.S. inflation reached a fresh four-decade high last month, accelerating at a 7.5% annual rate compared with expectations for a 7.3% increase. Prices were up sharply for nearly every category of everyday household items including groceries, electricity, vehicles and shelter. The food index rose 0.9% in January following a 0.5% increase in December. The energy index gained 0.9% over the month, with an increase in the electricity index partially offset by declines in the gasoline index and the natural gas index. Energy prices rose 27%, easing from November's peak of 33.3%.

New research from Moody's Analytics showed an average U.S. household is now spending an additional $250 a month under the current inflation environment compared to the Fed's long-run target of 2%. This means consumers in the United States essentially have less discretionary income that corelates closely with gasoline consumption. Traders will be closely monitoring incoming demand figures for indications of weakening consumption going into the spring and summer seasons.

January's price acceleration also increased the likelihood Federal Reserve officials would speed up a series of interest-rate increases this year. St. Louis Federal Reserve President James Bullard said Thursday he has become "dramatically" more hawkish after seeing January's inflation figures, and now favors a full percentage point increase in the federal funds rate over the next three central bank policy meetings. According to the CME Fed's Watch Tool, investors now price in a 96.7% likelihood for a 50-basis point interest rate hike at the Federal Open Market Committee's March meeting.

In reaction to the data, the U.S. Dollar Index strengthened 0.17% against a basket of foreign currencies for a 95.548 settlement, while also weighing on front-month WTI futures, which settled just below $90 bbl on the session. International crude benchmark for April delivery slipped $0.14 to $91.41 bbl. NYMEX March RBOB futures moved 1.20 cents higher to $2.6654 gallon, and the front-month ULSD contract edged higher to $2.8272 gallon.

Separately, Organization of the Petroleum Exporting Countries said on Thursday global oil demand would reach the pre-pandemic level of 100.8 million barrels per day (bpd) this year, driven by continued improvement in global mobility trends, manufacturing activity and consumption for petrochemical feedstock. Oil demand in developing countries is seen growing 2.3 million bpd this year, surpassing the pre-pandemic level of 2019 by around 2 million bpd.

China, India and Other Asia are the main drivers behind the gains in developing countries, making up more than two-thirds of the projected growth volume. In China, the ongoing return of mobility is seen boosting gasoline demand, which is projected to grow by around 200,000 bpd year-on-year, with diesel and jet fuel consumption adding support.

The demand forecast for countries that are part of the Organization for Economic Cooperation and Development is for growth of 1.8 million bpd, holding below pre-pandemic levels in absolute volumes.

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

Liubov Georges