DTN Oil

WASHINGTON, D.C. (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 amid a sharp retreat in the U.S. dollar index as investors repositioned for the Federal Open Market Committee to slow the pace of interest rate increases beginning at their next meeting later this month after softer-than-expected economic data raised hopes that inflation is abating.

At the start of the new trading week, the U.S. dollar index fell sharply against a basket of foreign currencies to settle near a seven-month month low at 102.743 after a survey from the Federal Reserve Bank of New York released this morning showed consumer inflation expectations for the year ahead dropped to its lowest point since July 2021.

Expectations for 2023 inflation fell in December by 0.2% to 5%, while three-year ahead inflation expectations were unchanged in December at 3%. The incremental drop in short-term expectations is encouraging for the Federal Reserve, which closely monitors such expectations as a gauge of whether inflation is becoming entrenched in consumers' financial decisions.

Atlanta's Federal Reserve Bank President Rafael Bostic on Monday said that should December's inflation report be consistent with the employment data for last month that showed a sharp slowdown in wage growth, FOMC should consider a 25-point hike in the federal funds rate when they meet Jan. 31-Feb. 1. That would be a step down from the 50-basis point hike decided during the FOMC's final meeting of 2022, and the 75-point hike during each of their previous four meetings.

Bostic further noted that if there was a recession this year, it would be shallow, short, and unlikely to impact the average consumer.

His comments follow the Bureau of Labor Statistics December employment report released Friday (1/6) that showed the labor market is still growing at a rapid clip, adding an average of 229,000 new jobs over the final three months of the year, even as wages have come down significantly from November. Over the past 12 months, average hourly earnings increased 4.6%, moving closer to the 3.5% target established by the Federal Reserve as sustainable for stable inflation. The jobless rate unexpectedly fell 0.2% from the previous month to 3.5% -- matching the 50-year low seen just before the outbreak of COVID-19 pandemic in early 2020.

Meanwhile, U.S. services industry activity contracted for the first time since May 2020 amid weakening demand and easing of prices paid by businesses, offering more evidence that inflation is abating.

Investors will now shift focus to Fed Chairman Jerome Powell's speech at the International Symposium on Central Bank Independence in Stockholm, Sweden, beginning at 9 a.m. ET.

Earlier in the session, oil futures got a leg up from fresh data suggesting China will see a strong rebound in this year's holiday travel that would last for 40 days, culminating in the Lunar New Year on Jan. 21. China's Ministry of Transport estimates that about 2.095 billion people will travel for the Spring Festival, with passenger volume by air, rail and road expected to surge by 99.5% from 2022. The figure is still some 30% below the pre-pandemic record set in 2019. The estimate is based on early bookings made by Chinese and international travelers despite the ongoing surge of COVID-19 infections.

China Eastern Airlines said on Saturday that it plans to allocate 753 aircraft for the upcoming travel rush, with average planned daily flights of more than 2,900, and the planned passenger seat kilometers returning to 87% of the pre-epidemic level in 2019. Air China also plans to arrange 58,633 flights over the next few weeks, an increase of 75.9% year-on-year with a significant growth in domestic routes.

These data points bode well for the consumption of jet fuel, diesel and gasoline in Asia that have been depressed by an estimated 1 million bpd on the back of China's zero-COVID policies. For context, the number of passengers carried by road in 2022 was down 82%, air by 63%, and rail by 52% compared with before the pandemic. Should estimates for this year's travel rush be realized, the so-called J-curve for China's oil demand -- lower consumption and prices in the first quarter but higher in the second half of the year, might be pulled forward.

At settlement, West Texas Intermediate for February delivery advanced $0.86 to $74.63 bbl, and Brent March futures on ICE rallied $1.08 to $79.65 bbl. NYMEX RBOB February contract added $0.0483 to $2.2929 gallon, and front-month ULSD futures gained to $3.0360 a gallon, up $0.0315 on the session.

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