DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled Friday's session mostly higher, although all petroleum contracts pared gains after U.S. inflation data offered more evidence of an overheated economy and ongoing inflationary pressures in the services sector, paving the way for the Federal Reserve to continue raising interest rates into restrictive territory.

Personal Consumption Expenditures Index, Fed's preferred inflation measure, increased 5.4% from a year ago in January, up from 5% at the end of 2022 and well above the Fed's 2% target. On a monthly basis, inflation accelerated to 0.6% from December's 0.1% reading, with consumer spending climbing 1.8% after a negative 0.1% print in December.

The PCE index is considered to have a broader scope compared to the Consumer Price Index, measuring the change in goods and services consumed by all households, unlike the CPI index which measures the change in out-of-pocket expenditures of all urban households.

"The ongoing imbalance between the supply and demand for labor, combined with the large share of labor costs in the services sector, suggests that high inflation may come down only slowly," Fed Governor Philip Jefferson told a conference in New York on Friday.

Friday's inflation data follows several strong labor market indicators as well as faster-than-expected retail sales and producer price inflation, reinforcing the view that the Federal Reserve would have more work to do to slow down an overheated economy. Markets see rising odds for the central bank to raise the federal funds rates by 50 basis points at their March 22 meeting and to reach a terminal rate of 5.25% to 5.5% as soon as June.

Fed officials lifted their benchmark interest rate by 25 basis points at the start of February, bringing the target to a range of 4.5% to 4.75%. That was a step down from their 50-basis point increase at their December meeting, which followed four consecutive jumbo-sized 75-basis point hikes.

In response to the data, U.S. dollar index spiked 0.6% against a basket of foreign currencies to settle at 105.158, initially pressuring front-month West Texas Intermediate futures in early trading. WTI futures reversed higher late morning and settled up $0.93 at $76.32 per barrel (bbl). International crude benchmark Brent for April delivery rallied $0.95 to $83.16 per bbl. NYMEX RBOB March declined $0.0208 to $2.3587 per gallon, and nearby-month NYMEX ULSD futures advanced $0.0881 for a $2.7962-per-gallon settlement.

Potentially supporting the oil complex are signs that Russia is preparing to cut oil exports from its Western ports beginning next month as it reroutes petroleum flows toward Asia. Unconfirmed reports suggest Moscow will reduce oil exports by as much as 25% from the ports of Primorsk and Ust-Luga on the Baltic Sea and Novorossiysk on the Black Sea that mostly handle oil cargos bound to the European Union.

Russia doesn't plan to cut oil exports from its Pacific ports, according to unidentified sources. Since the start of its Ukrainian offensive on Feb. 24, 2022, Moscow has sought out new buyers for oil sales outside of Europe, with Asia and the Middle East the leading new customers. Bloomberg data shows Russian oil exports to India -- the world's third-largest oil importer, jumped to 1.25 million barrels per day (bpd) at the start of the year from a modest 250,000 bpd before last February's invasion of Ukraine.

The rerouting has come at a price of steep discounts for Russian barrels that are selling well below global benchmarks such as Brent, West Texas Intermediate and Oman/Dubai. Traders and shipping companies have found a multitude of ways to ensure Russian oil can flow on the global market, with so-called "ship switching" proliferating in international waters outside of Greece and Spain. Once the cargos are switched, the receiving tankers then ferry the oil thousands of miles to buyers in Asia and Middle East.

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