Oil Falls to 3-Month Low Before Inflation Data, Fed Rate Call

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Intercontinental Exchange Brent crude nosedived 4% or more on Monday, sending West Texas Intermediate well below $70 per barrel (bbl) as investors positioned ahead of Tuesday's Consumer Price Index release for May that is expected to show further moderation in headline inflation but nonetheless a slow easing in core prices that will likely keep the Federal Reserve reiterating a hawkish message of more rates hikes before finally pausing the tightening cycle.

Markets widely expect a moderating trend in CPI's inflation reading to have continued in May and anticipate headline inflation to have fallen to 4.1% from a year earlier, down from 4.9% in April. On a monthly basis, inflation is seen easing to 0.2% -- marking the lowest CPI reading in almost two years. However, progress in core CPI prices that show a better picture of underlying inflation will likely be less noticeable, with economists expect a 5.3% reading for the month of May, down fractionally from April's 5.5%.

The slow disinflation trend in core CPI categories that include housing, cars and medical services doesn't sit well with policymakers at the Federal Reserve, and many have voiced their support for another rate hike as "an insurance policy against spreading inflation."

While market expectations are for the Fed to skip a rate hike at Wednesday's meeting, one final hike is considered likely in July before an extended pause that now is projected to last into the early part of 2024, according to a CME Group gauge of trading in the fed funds futures market. The CPI report, plus another month's worth of data before the Fed's July 25-26 meeting, could go a long way in determining whether the market is correct or if officials decide they have more work to do.

Further weighing on the oil complex, Goldman Sachs on Sunday revised lower its price forecast for both Brent and WTI futures, citing stronger-than-expected supplies from Russia, Iran, and Venezuela, which will keep global oil market well supplied through 2024. The bank now believes oil prices will end this year at $86 bbl, down from its earlier forecast of $95 bbl. For 2024, Goldman forecasts an average price of $82 bbl compared to its prior $88 bbl forecast. The Saudi plan to slash output by 1 million barrels per day (bpd) from July will only partly offset that increased supply, Goldman analysts estimate.

For context, Russian crude oil exports have fully recovered to their pre-war level despite the decision by many companies to stop buying Russian oil and a ban of Western financial and logistical services. S&P Platts Global Commodities estimates Russia-origin seaborne oil flows averaged 3.76 million bpd last month -- the highest monthly rate since April 2022, and almost 20% above the pre-war level of 3.1 million bpd. Iranian exports have also risen, partly on the back of a recovery in Chinese demand, while Venezuela production has edged higher following new production and export licenses reintroduced in November 2022.

Further adding to bearish sentiment, regional news outlets in Middle East reported last week the United States and Iran may be nearing a temporary nuclear deal that could un-sanction Iran's oil exports, adding large supplies of crude to the global market. Although the White House quickly dismissed media reports of a breakthrough, the oil complex remains under pressure as markets assessed the potential for a nuclear deal to be reached in the coming weeks. Israel's Haaretz and other regional outlets cited high-ranking Israeli officials who said the talks are moving forward more quickly than expected, with the possibility for the two sides to reach an agreement as early as this month. Iran could restore about 1 million bpd of crude oil production within months of a deal, traders and analysts said last year before talks broke down. It could be back to full capacity of about 3.7 million bpd by next year. The Persian Gulf country's oil exports already climbed to about 1.3 million bpd in November, and last month held near the highest in four years, according to data from Vortexa Ltd.

At settlement, NYMEX WTI July futures declined $3.05 to $67.12 bbl, while the August contract for the Brent benchmark fell $2.95 to $71.84 bbl. NYMEX RBOB July futures pulled back $0.1106 gallon to $2.4826 gallon and ULSD July futures dropped to $2.3091 gallon, down $0.0519 gallon on the session.

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

Liubov Georges