Oil Sinks as Retail Sales, Inflation Surprise to the Upside

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 accelerated losses in afternoon trade Thursday. The losses followed stronger-than-expected retail sales along with falling unemployment claims that raised the prospect for an aggressive interest rate hike at the Federal Open Market Committee meeting on Sept. 20-21, with the view the central bank is struggling to contain inflation in a tight labor market with persistent consumer spending.

U.S. retail sales for August showed continued demand for goods and services despite rapidly tightening financial conditions and high inflation. Americans spent more on groceries, cars, and apparel as gasoline prices fell for the second month through August, potentially boosting inflation for core consumer goods. Excluding gas stations, actual retails sales rose by 0.8% in August, up sharply from a negative 0.2% seen in the previous month. Continued strong job growth and rising wages are likely giving consumers a tailwind, even as they grapple with rapidly rising prices for everyday goods. Economists say that alone would keep the Federal Reserve on track to raise the benchmark federal funds rate to slow demand and inflation. Fed Funds futures imply the U.S. central bank will raise interest rates over the next six months to 4.25%-4.50% before April 2023 from 2.25%-2.50% at present to chock off the flow of credit to slow the economy. The odds of an unprecedented 100-basis-point rate hike at next week's FOMC meeting increased to 20% on Thursday from zero prior to Tuesday's release of August inflation data, the CME FedWatch Tool shows. The overwhelming majority of investors, however, still see a higher likelihood for a 75-basis-point rate hike.

The expected slowdown of the business cycle and potential for recession is evident in diesel markets where demand for the middle-of-the-barrel fuel that closely correlates with economic performance plunged more than 35 cents this week. Diesel supplied to the U.S. market slumped 17% last week alone to the lowest level since December 2020 at 3.132 million barrels per day (bpd). Over the past four weeks, distillate fuel consumption averaged 3.6 million bpd, down by more than 11% from the same period last year.

NYMEX October ULSD futures plummeted 17.37 cents to a $3.2052-per-gallon settlement Thursday, a five-week low on the spot continuous chart.

Further evidence of demand destruction can be found in the gasoline complex, where demand for the transportation fuel declined 233,000 bpd to 8.494 million bpd last week. On a four-week basis, gasoline consumption in the United States now stands at 8.6 million bpd, down a full 9% from a year ago.

NYMEX October RBOB futures declined 9.58 cents to $2.4287 per gallon.

NYMEX October West Texas Intermediate futures declined $3.38 to $85.10 per bbl, and ICE November Brent fell to a $90.84-per-bbl settlement, down $3.26 per bbl on the session.

Separately, traders are tracking Tropical Storm Fiona that formed overnight, sustaining wind speeds of 50 mph into Thursday afternoon. DTN Weather Ops forecasts Tropical Storm Fiona will track across the Greater Antilles this weekend into early next week, then curving north into the western Atlantic mid to late next week. Favorable tropical conditions continue to stretch across the Central Atlantic between Africa and the Antilles and are also noted over the Florida Straits/Bahamas region. Weather Ops will continue to closely monitor the series of tropical waves pushing across the Atlantic late this week as this region will have the highest potential to show signs of tropical cyclone formation.

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

Liubov Georges