DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Monday's session with solid gains underpinned by a sharp decline in the U.S. Dollar Index ahead of the release of August inflation data that could show consumer prices in the United States fell for the first time in 2-1/2 years as the Federal Open Market Committee positions to sharply raise its benchmark interest rate later this month.

U.S. Bureau of Labor Statistics on Tuesday will release its consumer price index for the month of August, with consensus calling for aggregate inflation to have fallen 0.1% from the previous month after posting no change in July. If confirmed by the data, the annualized rate of inflation could slow to 7.9% from 8.5% in July and 9.1% in June, with June's reading the highest since 1981.

Falling gasoline prices are primarily responsible for driving inflation lower over the past two months. American Automobile Association shows the national average for a gallon of regular grade gasoline declined for the 91st consecutive day through Monday to $3.716 gallon, down from mid-June's record high $5.016 gallon.

Further evidence of easing inflation could be found in last month's release of consumer expectations from the Federal Reserve Bank of New York that revealed inflation expectations continued to decline across all horizons. Median one-year ahead inflation expectations fell to 5.7% from 6.2% in July, while the three-year measure fell to 2.8% from 3.2%. Median home price expectations declined sharply by 1.4% to 2.1%, its lowest reading since July 2020 and falling below pre-pandemic levels. Surprisingly, the median expected growth in household income increased by 0.1% to 3.5% in August, a new series high.

Some in the market speculate the Federal Reserve should be prepared to back off on plans to sharply raise its benchmark short-term interest rate at its policy meeting in late September. Fed officials pushed back against this narrative on several occasions, with Fed Chairman Jerome Powell cautioning against prematurely declaring victory against inflation. CME's FedWatch Tool indicates 92% of investors believe the central bank will hike the federal funds rate 75-basis points during the Sept. 21-22 FOMC meeting compared with 57% a week ago.

Underlying gains for the oil complex, markets continue to monitor ongoing discussions around the G7 plan to cap the price of Russian oil exports that could potentially prompt the government of Vladimir Putin to throttle back oil output. U.S. Treasury Department on Sunday issued early guidance of compliance that bars financial institutions and shipping companies in G7 countries from providing tankers, insurance, and other critical financial services for the seaborne shipment of Russian oil unless the sale falls under a set price cap. The measure will offer three different price controls, one for crude oil and two for refined petroleum products. The exact level of the price cap has yet to be finalized, but it has been stressed that it must be set above the breakeven cost for Russian producers including shipping and insurance costs. For reference, an average cost for Russian oil production varies between $30 and $40 per barrel (bbl), although remote basins in Eastern Siberia and Arctic have a much higher price tag due to harsh climate and infrastructure challenges.

The measure is likely to override the European Union ban on purchases of Russian oil and refined products that is set to take place on Dec. 5 and Feb. 5, 2023, respectively, which should, in theory, allow for more Russian oil to be available on the global market. The risk, however, is that Putin could retaliate by cutting back oil production, tearing up export contracts that send global oil prices higher. The result would be catastrophic for Russian oil industry that might never recover from such a heavy blow and highlights the uncertainty for the global oil market.

At settlement, NYMEX October West Texas Intermediate futures advanced $0.99 to $87.78 bbl, while Brent for November delivery climbed to $94, up $1.16. NYMEX October RBOB futures rallied 1.17 cents to $2.4448 gallon, and NYMEX October ULSD futures added 2.44 cents to $3.6031 gallon.

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