DTN Oil

WASHINGTON (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced early Thursday, propelled by a sharp pullback in the U.S. Dollar Index as investors positioned ahead of the release of U.S. consumer price index report for the month of December that is expected to show further deceleration in the headline and core inflation, paving the way for a smaller rate increase from the Federal Reserve next month.

The headline consumer price index for the month of December is expected to show a 6.5% rise in annualized inflation, down from 7.1% seen over the month of November, and the Core CPI, which excludes volatile food and energy prices, easing to 5.7% from 6%. Both measures would be the lowest annualized print since December 2021. On a monthly basis, the U.S. CPI is forecast to stay unchanged at 0.0% while the Core CPI is projected to rise to 0.3%, a somewhat stronger reading compared to November. The core CPI will be the focus of Thursday's trading with investors looking for clues on whether price pressures in the services component of the economy are on a downtrend. For the context, core CPI has been declining for each of the past two months, coming down from 0.5% in September to 0.2% in November. The easing inflation is reflected in sharp pullback in the U.S. Dollar Index that has been moving in a downtrend since early October with investors anticipating a less-aggressive policy tightening by the Federal Open Market Committee in light of soft inflation readings.

Currently, markets price in 79% likelihood for the Federal Reserve to step down its rate increases from to 0.25% during the February meeting, down from 0.50% in December and 0.75% seen over the course of July -- November of last year. Even a quarter percentage rate increase will bring the target range in federal funds rates to 4.5% to 4.75%. The big question mark, however, is what the Fed will do next. For a start, a large gap remains between what the Fed says it will do and what investors expect from it. The central bank official pledged to raise rates above 5% this year and leave them there for a long time. Markets disagree. Despite Chairman Powell's warnings, they are betting on shallower peak rate and some think that the first rate hike would come as early as this summer. Thursday morning's inflation report will be crucial in reconciling the gulf between expectations and the Fed's actual policy.

Separately, investors mostly shrugged off large crude build reported in U.S. Energy Information Administration inventory data on Wednesday as refiners were slow to recover run rates following December disruptions caused by unusually cold weather.

U.S. commercial oil inventories spiked 19 million barrels (bbl) in the reviewed week -- the biggest weekly inventory gain since February 2021 when Winter Storm Uri shuttered much of the Gulf Coast's refining capacity. Runs at domestic refiners recovered by a smaller-than-expected 4.5% last week to 84.1% of capacity, processing 14.7 million barrels per day (bpd), which is still the lowest level since late March 2021 amid the protracted recovery from Uri.

Domestic oil producers raised output for the second straight week through Jan. 6 to 12.2 million bpd.

Further details of EIA's weekly report showed gasoline inventories jumped 4.1 million bbl in the reviewed week to 226.8 million bbl compared with expectations for a 600,000 bbl increase. Demand for transportation fuel recovered only 44,000 bpd in the reviewed week to 7.558 million bpd after harsh winter weather kept drivers off the road in parts of the country.

Distillate demand, however, rose 1.022 million bpd to 3.821 million bpd from the lowest weekly consumption rate since April 2020 when the coronavirus pandemic shuttered large chunks of the economy. Domestic distillate stocks declined 1.1 million bbl to 117.7 million bbl.

Near 7:45 a.m. EST, West Texas Intermediate for February delivery rallied $1.08 to $78.49 bbl, and Brent March futures on ICE added $1.19 to $83.86 bbl. NYMEX RBOB February contract advanced $2.4677 to $2.4671 gallon, and front-month ULSD futures traded little changed near $3.2198 gallon.

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