DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange (NYMEX) and Brent crude on the Intercontinental Exchange settled Thursday's session lower as weak demand for fuel domestically and concern over the effect of inflation on consumer spending prompted a pullback.

Wholesale price inflation slowed month-to-month in March at a 0.2% growth rate from 0.6% in February, although year-on-year, the producer price index increased 0.5% to 2.1%, according to the Bureau of Labor Statistics (BLS) Thursday morning. The data initially weighed on the U.S. dollar which soared Wednesday to a five-month high following the consumer price index from BLS showing consumer-level inflation was again hotter than expected in March. The U.S. dollar edged up to a fresh five-month high settlement of 105.064 in index trade against a basket of foreign currencies Thursday afternoon.

Inflation is proving stickier than many expected with investors now thinking the Federal Reserve will not begin cutting interest rates until September. A week ago on April 4, most investors expected the Federal Open Market Committee would cut the federal funds rate 25 basis points from its 5.25% to 5.5% target range in June, according to the CME FedWatch Tool. Thursday's PPI did encourage some investors for a rate reduction in July with a 50.3% probability for no rate cut compared to a 57.6% probability on Thursday.

Inflation is emanating from a robust labor market and strong economic growth with the Federal Reserve Bank of Atlanta's GDPNow indicator calling for a 2.4% expansion in U.S. gross domestic product in the first quarter. The reading, however, masks a bifurcated economy with small business operators in March the most pessimistic about their outlook since December 2012, according to the National Federation of Independent Business, with inflation the biggest concern.

The cumulative effect of inflation and high interest rates for longer could not only slow business growth, with distillate fuel demand historically closely tied to economic growth but also consumer spending. The St. Louis Federal Reserve Bank's FRED economic data show debt on consumer credit cards and revolving loans at more than $1 trillion in late March.

Energy Information Administration on Wednesday reported gasoline supplied to the U.S. market during the four weeks ended April 5 at 8.843 million barrels per day (bpd), down 241,000 bpd or 2.7% against the comparable year-ago period. Distillate fuel demand during the four-week period is 349,000 bpd or 8.9% lower than a year ago.

At settlement, NYMEX May RBOB futures were down $0.0075 lower at $2.7741 gallon, and the May ULSD contract lost $0.0478 to $2.6598 gallon. NYMEX West Texas Intermediate futures settled $1.19 lower at $85.02 bbl, and ICE June Brent eased $0.74 to $89.74 bbl.

Brian L. Milne can be reached at brian.milne@dtn.com.