DTN Oil

WASHINGTON (DTN) -- Following a two-session sell-off triggered by concerns over global economic growth this summer, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced early Wednesday as investors positioned ahead of the release of key inflation data in the United States that could show core consumer prices had peaked in March, easing concerns over further gains to sky-high inflation that climbed to a 40-year high at the end of the first quarter.

Wednesday's trading will be dominated by April's Consumer Price Index scheduled for an 8:30 a.m. EDT release from the U.S. Bureau of Labor Statistics, with consensus calling for core CPI, which excludes volatile food and energy prices, to ease from a 6.5% year-on-year increase to 6%.

For the 12-month period ending in April, economists estimate inflation eased to 8.1%, which would mark the first decline in the closely watched indicator in almost a year.

Lower gasoline prices last month are thought to have capped the monthly rise in inflation, as well as a drop in used car sales prices. The big uncertainty lies in the food component of April CPI, which likely remained very strong due to war in Ukraine and rattled supply chains. If global food prices could give any forward guidance, the United Nations Food and Agriculture Organization reported Global Food Price Index inched down 0.8% in April from an all-time high recorded in March, as a drop in vegetable-oil prices marginally mitigated the effects of the war in Ukraine.

Despite calls for a cooling in inflation pressure, the domestic labor market is still exceptionally tight and rattled supply chains lag consumer demand, which will keep pressure on the Federal Reserve to continue raising interest rates in coming months. Earlier this month, the Fed hiked the federal funds rate by a rare 50 basis points -- the single largest hike in interest rates by the central bank in 22 years. Speculation is growing the central bank will have to raise interest rates even more aggressively later this year should inflationary pressures accelerate.

On Monday, Federal Reserve Bank of Atlanta President Rafael Bostic suggested two or three more 50 basis points rate hikes are needed this year, a view shared by Cleveland Federal Reserve President Loretta Mester who backs even larger rate hikes should inflation not cool off in the second half of the year.

"We don't rule out 75 forever. We're going to have to assess whether inflation is actually moving down, and then we'll be able to get more information after we do a couple of those to see," she said, referring to 50 basis point hikes.

The aggressive path for interest rate hikes laid out by the Fed joined with sky-high inflation unnerved investors over growth prospects in the United States and even a potential recession as other large economies in Asia and European Union decelerated sharply in recent months. For reference, China saw a large decline in new home and car sales last month as government slapped harsh lockdown measures across the nation's largest cities of Beijing and Shanghai.

Wednesday's move higher in the oil complex comes despite the American Petroleum Institute reported U.S. oil and petroleum product supplies unexpectedly rose during the first week of May, missing calls for across-the-board drawdowns. Commercial crude oil stocks increased 1.62 million barrels (bbl) last week compared with expectations for a modest 300,000 bbl decline. Gasoline stockpiles added 823,000 bbl versus consensus for a drop of 1.7 million bbl. API data also showed distillate inventories gained 660,000 bbl, missing estimates stocks would fall 1 million bbl.

Should the build in the distillate stocks be realized in official data to be released Wednesday morning, it would offer much-needed relief for inventories that stand at a critically low level of 104.9 million bbl, some 22% below the five-year average. At the current rate of consumption, domestic stocks of distillate fuels could cover just four weeks of demand compared to close to 35 days in the same period last year.

DTN Refined Fuels Demand data revealed U.S. distillate demand for the week ended May 6 decreased 0.3%, led by developing weakness in the PADD 5 West Coast, while gasoline consumption increased 1% amid strong demand pull in the PADD 4 Rocky Mountain region.

Near 7:30 a.m. EDT, NYMEX June West Texas Intermediate gained $4.25 bbl to trade at $104.02 bbl and Brent crude surged to $106.58 bbl, up $4.17. NYMEX June RBOB futures advanced 7.99 cents to $3.6215 gallon and the front-month ULSD contract traded near $4.0470 gallon.

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