DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange declined sharply in early morning Tuesday, dragged lower by an announcement from the U.S. Department of Energy (DOE) that it plans to release an additional 26 million barrels (bbl) from the Strategic Petroleum Reserve (SPR) in the fiscal year 2023.

The sale comes on top of a record 180-million-bbl release executed last year in a response to the Russian invasion of Ukraine and subsequent price increases in the energy complex. "This sale will fulfill the congressional mandate set forth in section 403 of the Bipartisan Budget Act of 2015 and section 32204 of the Fixing America's Surface Transportation Act," said the DOE. The oil offered for sale will be drawn from the Big Hill site in Texas, 6 million bbl, and the West Hackberry site in Louisiana, 20 million bbl. The DOE said the oil sold from the SPR will be delivered from April 1 through June 30. Bids for the sale are due by Feb. 28, with contracts to be awarded no later than March 8. Congress last year cancelled previously mandated sales of 140 million bbl of SPR crude that were set to take place between fiscal years 2024 through 2027.

In financial markets, the U.S. Dollar Index extended losses against global currencies as investors awaited the crucial inflation report for January. The U.S. Labor Department will release the Consumer Price Index report (CPI) at 8:30 a.m. EST. Consensus calls for a 0.5% monthly increase in average consumer prices -- a marked jump from the negative 0.1% reported in December, driven mainly by an uptick in gasoline and energy costs. For context, average gasoline prices in the United States increased to $3.416 a gallon late January, up from $3.294 a gallon seen at the end of 2022, according to the American Auto Association (AAA).

The increase would be an interruption of a recent downtrend in headline inflation, making the case for a difficult path ahead to reaching the Fed's 2% inflation target.

The key question is whether the tight labor market at the start of the year translated into higher consumer prices for everyday items and core services. "Some of the temporary factors that were holding inflation down, especially falling used car prices, are probably over. On the other side, official shelter prices are still rising fast, even though rents are probably falling, because of the known lags," tweeted Nobel laureate and economist Paul Krugman. Markets seem to expect January's core inflation rate, which excludes volatile prices for food and energy, to remain steady at December's level of 0.3%. On an annualized basis, both headline and core inflation are expected to moderate to 6.2% and 5.5%, respectively.

Higher-than-expected inflation in January would likely signal that the Federal Open Market Committee (FOMC) will need to hike the federal funds rate, now in a 4.5% to 4.75% target range, even higher, putting downward pressure on the economy and the market.

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 that the central bank would cut rates soon. Currently, a majority of investors expect the FOMC to raise the federal funds rate 25 basis points in March followed by a similar rate increase in May before the central bank hits pause until December when a rate cut is expected. The inflation report for January could certainly realign most of these expectations.

Near 7:30 a.m. EST, West Texas Intermediate futures for March delivery declined $1.17 to $78.97 bbl, and the international crude benchmark Brent contract on ICE fell $0.95 to $85.66 bbl. NYMEX RBOB March contract retreated $0.0269 to $2.5036 gallon, and March ULSD futures added $0.0069 to $2.9126 a gallon.

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