DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange followed equity markets lower in afternoon trading Thursday. The losses came after the U.S. producer price index offered more evidence of sticky inflation at the start of the year, raising the odds that the Federal Reserve will lift interest rates more aggressively in the coming months.

U.S. producer prices, a measure of inflation at the wholesale level, unexpectedly jumped 0.7% in January compared with 0.2% decline reported at the end of 2022, data released from the Bureau of Labor Statistics showed. Economists estimated a much cooler reading of 0.4% in the reviewed month.

An increase in producer prices today typically translates into higher consumer prices tomorrow. Although transmission lags between producer and consumer prices are still a subject of debate among economists, recent price increases will almost certainly force the hand of the central bank to continue to remain aggressive in tightening monetary policy by lifting the federal funds rate in the coming months more than the market had expected.

That adjustment in the market's outlook is reflected in expectations that the Fed's terminal rate this year would reach 5.25% to 5.5% as early as June, with the federal funds rate now in a 4.5% to 4.75% range. Some Fed officials have suggested the central bank must move faster to reach the targeted range.

Cleveland Fed President Loretta Mester told reporters after a speech Thursday that she saw "a compelling economic case for keeping the pace at 50 basis points at the last meeting."

Mester said it was too early to specify the size of the rate increase that would be appropriate at the Fed's next meeting on March 21-22. However, the macroeconomic data released for January and early February clearly points to a reaccelerating economy and a higher outlook for inflation.

U.S. retail sales for January unexpectedly jumped 3% last month -- the most in nearly two years despite elevated inflation and evidence of sectorial slowdown in parts of the economy. Americans once again spent more on cars, furniture, and purchases at department stores after only briefly pulling back on spending at the end of 2022.

The U.S. labor market added slightly more than half a million new jobs at the start of the year, signaling that people who stayed on the sidelines in post-pandemic months are returning to the labor force.

"The demand side of the economy is not weakening quite as fast as some thought it was," added Mester said.

U.S. equities moved lower on the session, with the Dow Jones Industrial Average shedding more than 380 points or 1.13% heading into the close. The S&P 500 dipped 1.2% and the Nasdaq-Composite fell 1.6%.

Despite the prospect for higher interest rates, the U.S. dollar eased 0.48% against a basket of foreign currencies to settle the session at 103.791.

NYMEX West Texas Intermediate futures for March delivery settled $0.10 lower at $78.49 per barrel (bbl), with the April contract settling at a $0.25 premium to the front-month contract. On ICE, April Brent crude declined $0.24 for an $85.14-per-bbl settlement. NYMEX RBOB March contract dropped $0.0623 to $2.4355 per gallon, and March ULSD futures fell $0.0336 to $2.8108 per gallon at settlement.

Mitigating greater losses for the oil complex are signs Chinese refiners increased oil purchases in the physical market, drawing around 10 million bbl in crude cargoes for April delivery from Middle East and West African producers. This week, the International Energy Agency and Organization of the Petroleum Exporting Countries both lifted their global oil demand forecast spurred almost entirely by expectations for rising fuel consumption in Asia. IEA estimates Asia-Pacific region will see demand growth of 1.6 million barrels per day (bpd) in 2023, led by China, up 900,000 bpd from last year's consumption rate.

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