DTN Oil

WASHINGTON, D.C. (DTN) -- Reversing earlier losses, oil futures nearest delivery on the New York Mercantile Exchange settled the last trading session of January higher after the U.S. employment cost index showed wage pressure eased further at the end of 2022, potentially relieving some pressure for the Federal Open Market Committee that is poised to raise the federal funds rate by 25-basis points at the conclusion of Wednesday's meeting in their fight against inflation.

U.S. labor costs increased at their smallest pace in a year during the fourth quarter, showed data released this morning by the Bureau of Labor Statistics, supporting the case for the Federal Reserve to slow rate hikes in coming meetings. U.S. businesses spent 1% more on wages and benefits for their employees last quarter compared to a 1.2% increase in the three months ending in September. Fed officials signaled they are closely monitoring the figures for signs of acceleration in wage gains.

The U.S. labor market remains extremely tight despite Fed's aggressive campaign in raising the federal funds rate from nearly 0% a year ago to a 4.25%-4.5% range currently. The national unemployment rate remains near a 50-year low 3.5% and weekly unemployment claims keep on falling.

On Wednesday, FOMC is widely expected to dial back the size of rate increases to 0.25% but deliver yet another hawkish message that they are not pivoting until inflation is clearly going down to its 2% target. Officials at the central bank have repeatedly pounded the message that they see the federal funds rate rising above 5% this year and staying there until 2024, stressing the need to do more to tame prices.

In the Euro era, key inflation metrics unexpectedly accelerated at the start of the year, keeping the European Central Bank on track to raise the benchmark interest rate by 50 basis points on Thursday. In France, the bloc's second-largest economy, consumer prices quickened to 0.4% this month from a negative 0.1% in December, bringing the annualized rise in nationwide inflation to 6%. The reacceleration was driven by the rise in food prices, up 13.2% over one year, and a rebound in energy inflation.

Many companies and households across the Euro area are now facing the first upward revision of their energy bills, which will continue to push costs upwards. In France, the revision of the so-called "tariff shield" on consumers has led to a 15% increase in household gas bills at the start of the year. Electricity bills are further set to increase by 15% in February as the government gradually phases out price caps on natural gas usage. In contrast, consumer prices in Spain, which rose 5.8% in January, were completely driven by an increase in core inflation. Core inflation's continued rise is a worrying development across other Euro-area countries, showing that underlying price pressures in the economy are still very high.

ECB President Christine Lagarde and her colleagues in recent days doubled down on their pledge to raise interest rates by 0.5%, but the real question is what they will do at their March meeting.

"A 50bp hike in March is not a foregone conclusion, in our view. The forward guidance will likely remain hawkish, but still data and meeting dependent," Barclays said in a note to clients.

Also on Tuesday, oil traders positioned ahead of the release of U.S. weekly inventory data beginning with the industry survey from the American Petroleum Institute, followed by the Energy Information Administration data Wednesday morning.

U.S. commercial crude oil stockpiles are expected to have remained unchanged from the previous week, with estimates ranging from a decrease of 4 million bbl to an increase of 3.5 million bbl. Gasoline stockpiles are expected to have increased by 900,000 bbl, and distillate supplies are seen to have fallen by 1 million bbl. Refinery use likely increased by 0.5% from the previous week to 86.6%.

A softer U.S. dollar this afternoon comes as investors digested a new set of economic data, with the greenback falling 0.2% to 101.873 in index trading against a basket of foreign currencies, while supporting the front-month West Texas Intermediate contract, with March delivery advancing $0.97 to settle at $78.87 bbl.

On ICE, the international crude benchmark Brent contract for March delivery expired $0.41 lower at $84.49 bbl, with the April contract up $0.96 at $85.46 bbl. NYMEX RBOB February contract expired at $2.5435 gallon, up $0.0446, and March delivery settled at $2.5668 gallon. February ULSD futures advanced $0.0715 to expire at $3.1823 per gallon, with the March contract ending at $3.1448.

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