DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange resumed losses early Wednesday under pressure from a stronger U.S. Dollar Index as investors positioned ahead of the Consumer Price Index report release for April that is expected to show no improvement of inflationary pressures in either headline or core price categories.

The U.S. consumer price index -- a measure of inflation on consumer level -- likely increased by 0.4% in April, up from the 0.1% increase reported in the prior month. That would bring the annualized level of inflation to 5% -- unchanged from March and far from the Fed's long-run target of 2%. Core prices -- which exclude volatile energy and food categories -- are expected to hold steady at a monthly increase of 0.4% to match March's elevated gain. The Bureau of Labor Statistics is expected to publish the CPI report at 8:30 a.m. EDT.

April's inflation report comes after a slew of stronger-than-expected U.S. economic data showing still solid employment growth and accelerating wages last month.

The non-farm employment report surprised markets with 253,000 new jobs created, surpassing expectations for 180,000 as the unemployment rate returned to multidecade lows. Hourly wages, meanwhile, jumped 0.5% month-over-month from 0.3% reported in March. The combination of higher job growth and higher wages might lead to the conclusion that consumers had more money for discretionary spending that month, keeping core service prices elevated.

The CPI data will hold the utmost importance for the Federal Reserve after the Committee made it clear at its May 3 policy meeting that "it will take data a dependent approach to determine the extent of further rate hikes" as elevated inflation levels and the banking sector stress remain in focus. The Fed raised the target range for the federal funds rate by an expected 25 basis points to 5.0% to 5.25%. Federal Reserve Chairman Jerome Powell, however, adopted a cautious tone during his press conference, noting that the Fed is prepared to adjust the stance of monetary policy as appropriate if risks emerge.

It's worth noting, however, that the index for shelter, which makes up about a third of the core CPI, was by far the biggest contributor to the month-on-month CPI increase in March. Hence, a stronger-than-expected monthly inflation reading by itself might not be able to convince markets that the Federal Reserve will have to raise rates again if the shelter index remains the dominant factor.

Earlier in the week, the Fed's Senior Loan Officer Opinion Survey on Bank Lending Practices reminded investors of tightening financial conditions for businesses and consumers that might have taken some steam out of inflation last month. The Fed's quarterly publication showed that survey respondents noted "tighter standards and weaker demand for commercial and industrial loans to large and middle-market firms". Banks also reported that demand for all commercial real estate loan categories was weakening. "On balance, banks widely reported expecting to tighten their lending standards over the rest of the year," the Fed further noted.

The oil complex came under further pressure after the American Petroleum Institute reported surprise builds in domestic crude and gasoline stockpiles during the first week of May, countering a larger-than-expected drop in middle distillate inventories. The API reported a 3.618-million-barrel (bbl) build in commercial crude oil stocks, missing calls for an 800,000-bbl drawdown. Stocks at the Cushing, Oklahoma, tank farm -- the New York Mercantile Exchange delivery point for West Texas Intermediate futures -- dropped 1.316 million bbl. Gasoline inventory also added 399,000 bbl through May 5, missing an expected decline of 800,000 bbl. The API reported a drop of 3.945 million bbl in middle distillate inventory, far surpassing an expected 400,000-bbl decrease. Next, oil traders will parse through the official inventory report from the U.S. Energy Information Administration on tap for 10:30 a.m. EDT release.

Near 7:30 A.M. EDT, NYMEX West Texas Intermediate June futures declined $0.88 to $72.83 bbl, while ICE Brent July futures fell back $0.87 bbl to $76.57 bbl. NYMEX RBOB June futures slipped $0.0027 to $2.4772 gallon, and the front-month ULSD contract edged lower by $0.0108 to $2.3794 gallon.