DTN Oil

WASHINGTON (DTN) -- Nearby-month oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange accelerated losses Wednesday afternoon, with both the U.S. and international crude benchmarks retracing most of the gains triggered by geopolitical tensions in the Middle East under pressure from a stronger U.S. dollar and an unexpected rise in prices paid by U.S. producers as investors positioned ahead of fresh data on consumer-level inflation.

U.S. producer price index, a measure of U.S. inflation at the wholesale level, unexpectedly jumped to 2.2% in September from a year earlier, driven by an increase in energy and food prices, according to data released this morning from the U.S. Bureau of Labor Statistics. On a monthly basis, U.S. producer prices also exceeded market expectations with a 0.5% increase -- the third fastest pace of the year. The hotter-than-expected print for U.S. producer prices came a day before the closely watched Consumer Price Index, which is scheduled for an 8:30 AM ET release Thursday. Economists call for CPI to have eased to 0.3% in September from August's 0.6% increase. However, rising food and energy prices could once again upset those expectations.

In minutes from the Federal Open Market Committee's Sept. 19-20 meeting released this afternoon, central bank officials noted "policy should remain restrictive until the Committee is confident that inflation is moving down sustainably toward its objective."

The point of disagreement, however, was whether to raise the federal funds rate, now in a 5.25% by 5.5% target range, again at their Oct. 31-Nov. 1 meeting.

"A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted," the summary stated.

As investors positioned ahead of the September CPI report, the U.S. dollar index whipsawed from an intrasession high 105.765 traded against a basket of foreign currencies in front of the release of the FOMC minutes to a 105.480 afternoon low. Volatility in the greenback accelerated afternoon losses in front-month West Texas Intermediate futures, which settled the session $2.48 lower at $83.49 bbl, while ICE Brent shed $1.83 for a $85.82 bbl settlement. NYMEX November ULSD futures declined to $2.9985 gallon, down $0.0216, and front-month RBOB futures notched losses of $0.0483 with a $2.2101 gallon settlement.

Also on Wednesday, oil traders awaited the release of the weekly inventory report from the American Petroleum Institute delayed one day due to the Columbus Day holiday in the U.S. observed on Monday (10/9).

A consensus of analysts surveyed by Wall Street Journal showed U.S. commercial crude oil stockpiles likely decreased by 900,000 bbl for the week ended Oct. 6. Gasoline inventories are expected to have risen 400,000 bbl from the previous week, while stocks of distillates, which are mostly diesel fuel, are seen to have decreased 300,000 bbl. Refinery use likely fell by 0.3% from the previous week to 87% of capacity.

Oil traders continue to monitor escalating tensions in the Middle East as Israel prepares for a ground offensive in the Gaza Strip following the weekend attack on Israeli civilians. Although an upside risk for oil prices which increased significantly over the past 96 hours, the underlying fundamentals for global supply availability changed little since the breakout of war between Israel and the Palestinian terrorist group Hamas. Iran has unequivocally denied involvement in the weekend attack on Israeli civilians, and U.S. and Israeli officials have said there is no direct link between Tehran and the weekend attack. Analysts say unless direct involvement of actors outside of Gaza, namely Iran or Hezbollah, is proven in organizing the attack, there is limited potential for the ongoing hostilities to snowball into the larger regional conflict.

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