DTN Oil

WASHINGTON, D.C. (DTN) -- A third straight session gain by the ULSD contract was an outlier in an otherwise down session for oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange, which declined Tuesday following a mostly stronger inflation report for January that triggered some repricing by markets in how aggressive the Federal Reserve would need to be this year in raising interest rates to bring inflation down towards its 2% target.

Inflation in the United States increased 0.5% last month -- a marked jump from a negative 0.1% showing at the end of 2022, and the first monthly increase since October 2022. On an annualized basis, consumer prices climbed 6.4% in January from a year earlier, still slightly lower than the 6.5% year-on-year increase in December.

Americans paid more for shelter, gasoline, and utility bills that more than offset declines in some other categories considered core services. Gasoline prices rose 2.4% in January after falling in November and December, while natural gas utility prices leapt 6.7% higher in January from December -- the biggest increase since June 2022. While not entirely unexpected, these price increases are a drag on consumers' purchasing power and are increasingly forcing some consumers to make tradeoffs in what they buy.

Tuesday's inflation report will also keep the Federal Open Market Committee on track to raise the federal funds rate by another 0.25% in both March and May and, according to CME's FedWatch Tool, the market now expects a 0.25% rate hike during the FOMC's June meeting which would lift the federal funds rate to a 5.25% to 5.5% target range.

Based on the FedWatch Tool, markets are no longer pricing in a cut in the federal funds rate in December in the aftermath of the stronger inflation report, betting that the Federal Reserve will keep rates higher for longer.

Last week, Fed Chairman Jerome Powell reiterated that there is still a long way to go in the fight against inflation. Powell also noted that interest rates could rise more than markets anticipate if high inflation readings do not abate, dampening optimism over the disinflation narrative.

Further weighing on the oil complex, the U.S. Department of Energy Monday afternoon announced the sale of an additional 26 million bbl from the Strategic Petroleum Reserve this year to "meet Congressional mandate." The sale comes atop of a record 180 million bbl release executed last year in response to the Russian invasion of Ukraine and subsequent price increases in gasoline prices.

The oil offered for sale will be sweet and drawn from the Big Hill site in Texas, 6 million bbl, and the West Hackberry site in Louisiana, 20 million bbl. DOE said the oil sold from the SPR will be delivered from April 1 through June 30.

Also on Tuesday, oil traders positioned ahead of the release of the weekly inventory report from the American Petroleum Institute on tap for 4:30 PM ET, followed by official data from the U.S. Energy Information Administration.

Analysts and traders expect commercial crude inventories to have risen by 800,000 bbl during the week ended Feb. 10, with estimates ranging from a decrease of 3.2 million bbl to an increase of 2.6 million bbl. Gasoline stockpiles are expected to have increased by 1.5 million bbl from the previous week, while stocks of distillates, which includes diesel, jet fuel and fuel oil, are expected to have gained 200,000 bbl. Refinery use likely increased by 0.2% from the previous week to an 88.1% utilization rate.

At settlement, West Texas Intermediate futures for March delivery declined $1.08 to $79.06 bbl, and the international crude benchmark Brent contract on ICE fell $1.03 to $85.58 bbl. NYMEX RBOB March contract retreated $0.0426 to $2.4885 gallon, and March ULSD futures added $0.0344 for a $2.9401 gallon settlement.

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