DTN Oil

WASHINGTON, D.C. (DTN) -- Following a three-session rally, oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Monday's session lower as market participants look to a twofold risk to the demand outlook in China and the United States, where a softening labor market and faded post-pandemic recovery have undermined prospects of lower crude supplies from the OPEC+ alliance.

Monday's move lower in the oil complex comes as traders once again shifted their focus to weak demand signals out of China -- the world's largest crude-oil importer, where the economy struggles to pick up momentum after nearly three years of rolling lockdowns. China's inflation data released overnight revealed the producer price index slid deep into negative territory last month at –5.4% rate from a year ago, meaning demand for Chinese manufactured goods is lagging far behind last year's levels. Globally, manufacturing has remained in recession for nearly a year under pressure from rising interest rates across Western economies and demand rotation from goods-producing sectors into services.

China is an export-oriented economy that requires sustained demand for its manufacturing industries which is far from certain in an environment of geopolitical tensions and de-coupling from Western economies.

Domestically, investors await the release of the consumer price index for June, scheduled for publication at 8:30 AM ET Wednesday, with expectations for inflation to have eased amid a continued retreat in energy and food prices. Economists expect headline inflation will show it fell to 3.1% from a year earlier and that core inflation eased to 5% after spiking to a four-decade high 6.4% in September 2022.

The Survey of Inflation Expectations released this afternoon from the New York Federal Reserve showed that Americans anticipate short-term inflation will fall to the lowest level in just over two years at 3.8% compared to 4.1% expected in May. The longer-term inflation outlook, however, picked up pace slightly, with inflation projected three years ahead rising to 3% from May's 2.7% reading. The Federal Reserve inflation target is 2%.

The easing short-term inflation outlook in the United States could finally be driven by a softening labor market, with Friday's employment report showing employers added the fewest number of monthly jobs in June since late 2020. The headline employment number for June was 209,000, with most of the job gains concentrated in sectors of government, social assistance, and health care. The categories associated with post-pandemic job creations, including leisure and hospitality along with professional services, showed little change from the prior month. What's more, employment for both May and April were also revised lower, with average job growth over the two-month period now 110,000 lower than previously reported.

These data points bode well for the Federal Reserve's efforts to cool the labor market and broader economy for over a year now with the most aggressive rate hiking campaign in decades.

Investors in financial markets upped their bets that the central bank would not have to raise the federal funds rate much higher from the current 5% to 5.25% target range. Still, more than 92% of investors anticipate the Fed would lift rates by another 25 basis points during their July 26 meeting, according to the CME FedWatch Tool.

At settlement, the U.S. dollar index retreated against a basket of foreign currencies to finish at 101.642. NYMEX August West Texas Intermediate futures declined to $72.99, down $0.87 bbl on the session. ICE September Brent crude fell back $0.78 to $77.69 bbl. NYMEX August RBOB futures dropped $0.0197 to $2.5696 gallon, and August ULSD futures softened $0.0059 to $2.5532 gallon.

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