DTN Oil

WASHINGTON (DTN) -- Erasing earlier losses, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Wednesday's session with gains between 1% and 3.5%. Futures were supported by a sharp drop in the U.S. dollar after inflation data for July surprised markets to the downside, showing the first month-on-month decrease since April that is seen relieving some pressure on the Federal Open Market Committee in needing to make another aggressive rate increase at their meeting next month.

The U.S. consumer price index showed no change last month after spiking 1.3% in June, bringing annualized rate of inflation from a 41-year high 9.1% to 8.7%, according to data released this morning from the Bureau of Labor Statistics. A decline in gasoline prices, down 7.7% in July, offset increases in food and shelter costs, leading headline inflation to run at a cooler pace than markets had anticipated. Core prices, which exclude volatile food and energy categories, increased 0.3% from June, but are still at a slower pace than 0.7% rise in June from May. Core CPI rose 5.9% in July from a year earlier, the same annual pace as in June.

The fresh data may give Federal Reserve some breathing room at its Sept. 20-21 meeting when central bank officials will decide on another hike in the federal funds rate after raising rates by 75-basis points at their June and July meetings.

Fed Chairman Jerome Powell at his news conference in July said another 75-point rate rise could be on the table again in September but would "depend on the data we get between now and then."

FOMC will see one more monthly CPI report before their September meeting.

The CME Group's FedWatch is pricing in a 56.5% chance of a 50-basis point rate hike in September compared with 32% probability a day ago, which would take its target federal funds rate to between 3% and 3.25%, with the bulk of expectations pointing to a target range between 3.5% and 3.75% by the end of the year.

"We've tightened monetary policy quite a lot, very quickly," Chicago Fed President Charles Evans said Wednesday during remarks in Des Moines, Iowa.

He said he expected the central bank to raise rates for the rest of this year and into 2023 to ensure inflation returns over time to the Fed's 2% target.

Following this morning's BLS release, Atlanta Federal Reserve Bank's GDPNow model revised higher its third-quarter growth estimate to 2.5% from 1.4% on Aug. 4.

The repricing of Fed's anticipated rate move, and path of inflation moved markets on Wednesday, sending U.S. dollar index to its lowest trade against a basket of foreign currencies since July 1 at 104.515, settling the session down 1.1% to 105.080, while equities rallied. The Dow Jones Industrial Average jumped 535 points or 1.6%, the S&P 500 gained 2.1% and hit its highest level since early May at 87.77, while Nasdaq Composite rose 2.8%.

Nearby-month delivery West Texas Intermediate rallied $1.43 to $91.93 per barrel (bbl), and the ICE Brent contract for October delivery advanced $1.09 to $97.40 per bbl. NYMEX September RBOB gained 11.01 cents to $3.0703 gallon, while the NYMEX September ULSD contract surged 7.65 cents to $3.4103 per gallon.

Further supporting the oil complex, Energy Information Administration midmorning reported U.S. gasoline demand recovered 582,000 barrels per day (bpd) or 6.8% from the previous week to 9.12 million bpd in the week ended Aug. 5, narrowing the four-week average consumption rate from 8.8% below the comparable year-ago period to 6.3%. The rebound in gasoline consumption led to U.S. gasoline inventories dropping by a sizable 5 million bbl in the reviewed week, missing calls for stockpiles to have decreased by 500,000 bbl.

Offsetting some of the bullish data for the gasoline complex, U.S. commercial oil inventories climbed 5.5 million bbl to 432 million bbl, missing calls for crude stockpiles to have gained 500,000 bbl from the prior week. The larger-than-expected build occurred despite refinery run rate recovering 3.3% from the previous week to a 94.3% four-week high, which compares with calls for just a 0.5% increase. Oil stored at Cushing, Oklahoma, the delivery point for the WTI futures contract, increased 723,000 bbl from the previous week to 25.2 million bbl, EIA said in its weekly report. U.S. crude oil production rose by 100,000 bpd to 12.2 million bpd, the highest level since April 2020.

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