Oil Sells Off as Inflation Metrics Point to More Rate Hikes

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Intercontinental Exchange Brent crude accelerated losses in afternoon trade Friday amid a sharply stronger U.S. Dollar Index that rallied in response to fresh data pointing to expanding inflationary pressures in the coming months, with a large jump in the number of active oil rigs in the United States adding to the selling pressure.

Baker Hughes Friday afternoon said the number of active oil-targeted rigs in the United States climbed eight to 610 in the week-ended Friday. That's the highest level since late March 2020 and one of the largest weekly increases since before summer and follows a downgrade in this year's domestic oil production by the Energy Information Administration on Wednesday. In their monthly Short-term Energy Outlook, EIA forecast U.S. oil production this year at 11.7 million barrels per day (bpd), and for output to increase to a record high 12.4 million bpd in 2023.

All major forecasting agencies, including Organization of the Petroleum Exporting Countries and International Energy Agency, downgraded their global oil demand projections for the remainder of the year, citing slowing economic growth and rising interest rates. IEA now projects global oil demand will contract by 340,000 bpd in the current fourth quarter, pressing year-over-year consumption growth to 1.9 million bpd in 2022 and to 1.7 million bpd next year. In its Monthly Oil Market Report, OPEC cuts its global oil demand outlook for this year by 460,000 bpd from its projection in September.

"The world economy has entered into a time of heightened uncertainty and rising challenges, amid ongoing high inflation levels, monetary tightening by major central banks, high sovereign debt levels in many regions as well as ongoing supply issues," said OPEC.

Earlier this week, the International Monetary Fund released its World Economic Outlook downgrading global economic growth, projecting a slowdown from 2021's 6% expansion rate to 3.2% this year and 2.7% in 2023. For the United States, IMF cut its growth projection for this year by 0.7% from July's outlook to 1.6% following a 5.7% expansion in 2021, and to further slow to 1% in 2023.

"The 2023 slowdown will be broad-based, with countries accounting for about one-third of the global economy poised to contract this year or next," said Pierre-Olivier Gourinchas, IMF Economic Counsellor and Director of Research, in a blog following the release of the outlook on Tuesday. "Overall, this year's shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession."

In financial markets, U.S. dollar index powered higher against a basket of foreign currencies to settle the session at 113.202, pressuring front-month West Texas Intermediate futures. Renewed strength in the U.S. dollar follows the release of consumer sentiment index from University of Michigan Friday morning that showed inflation expectations unexpectedly climbed in early October.

Median expected year-ahead inflation rate rose to 5.1%, with increases reported across age, income, and education, adding to the inflation fears. In September, long run inflation expectations fell below the narrow 2.9% to 3.1% range for the first time since July 2021 but have since returned to that range at 2.9%.

Consumer expectations for heightening and enduring inflation are problematic for Federal Reserve officials, as it prompts consumers to buy now, expecting price increases in the weeks and months ahead. This, in turn, feeds inflation, meaning the Fed will need to remain aggressive in lifting the federal funds rate.

Friday's consumer sentiment report followed the release of consumer price index for September on Thursday by the Bureau of Labor Statistics which confirmed market fears that inflation in the U.S. economy is becoming more entrenched, broadening into the services sector that generally comprise about 80% of economic output. Core CPI, excluding volatile food and gasoline prices, surged to 6.6% in September -- the highest reading since 1982.

Following the CPI release, the CME Group's Fed Funds futures shows a 96.6% chance for the central bank to raise interest rates by another 75 basis points during their Nov. 1-2 meeting, which would be the fourth consecutive rate increase of this magnitude.

At settlement, NYMEX November WTI futures fell $3.50 to $85.61 per barrel (bbl), and ICE December Brent futures dropped $2.94 to $91.63 bbl. NYMEX November ULSD futures retreated 11.46 cents to $3.9802 gallon, and November RBOB futures dropped 7.25 cents to $2.6309 gallon.

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

Liubov Georges