Oil extends gains as slowing U.S. inflation signals smaller rate hikes ahead

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By Barani Krishnan

AiVIF.com -- Oil bulls seem to have had their prayers answered by the inflation gods.

The U.S. CPI, or Consumer Price Index, report for December came in at the lows forecast by economists, bolstering expectations that the Federal Reserve will keep to smaller rate hikes this year that would greatly assist businesses in the country, after the aggressive increases last year that sent tremors across markets. That naturally bolstered risk appetite in most forms today, including in oil.

Crude futures rose for a fifth time in seven days, with New York-traded WTI, or West Texas Intermediate, for February delivery up $1.16, or 1.5%, to $78.57 per barrel by 12:20 ET (17:20 GMT) after a session high at $79.16. The U.S. benchmark was headed for a 6.7% gain on the week, after an 8.4% tumble last week.

London-traded Brent crude for March delivery was up $1.50, or 1.8%, to $84.17, after an intraday peak at $81.61. That put the global crude benchmark on track to a 7% rise this week, after last week’s drop of 8.5%.

Inflation, as indicated by the CPI, rose by 6.5% in the 12 months to December, the Labor Department said Thursday. It was the slowest annual advance for the CPI since October 2021 and indicated smaller rate hikes ahead by the Federal Reserve, which raised rates aggressively last year to curb price pressures. 

The CPI hit a 40-year high in June when it grew at an annual rate of 9.1%, versus the Fed's inflation target of just 2% per annum. In a bid to control surging prices, the central bank added 425 basis points to interest rates since March via seven rate hikes. Prior to that, interest rates peaked at just 25 basis points, as the central bank slashed them to nearly zero after the global COVID-19 outbreak in 2020. The Fed, which executed four back-to-back jumbo rate hikes of 75 basis points from June through November, imposed a more modest 50-basis point increase in December. 

For its next rate decision on Feb. 1, economists expect the central bank to announce an even smaller hike of 25 basis points.

The Fed funds rate — a tool used to gauge the odds for a certain quantum of rate hike — was at over 80% on Thursday for a Fed increase of 25 basis points in February. The dollar, which rises as U.S. interest rates spike and falls as they slow, was at a six-month low versus a basket of six major currencies that included the euro and the yen.

“The Fed funds market is now more confident in 25 bps at 81% for the Feb 1 meeting and the U.S. dollar is now sinking,” economist Adam Button said in a post on the ForexLive forum.

The last the Fed announced a 25 basis-point increase was in March 2022, at the start of its current rate hike cycle.

Crude prices had one of their worst starts to a trading year when both WTI and Brent fell more than 8% in their opening week for 2023.

The slump came on the back of worries about a global recession and how quickly demand could recover in top oil-importing country China, which was just emerging from a protracted and severe coronavirus lockdown. On top of that, the start of the 2022/23 winter cycle is proving to be one of the warmest in two decades, sharply reducing the need for not just natural gas but also heating oil over the past few weeks.

Weekly oil inventory data released on Wednesday by the U.S. EIA, or Energy Information Administration, reflected this.

Crude stockpiles jumped by almost 19 million barrels last week, or 11 times more from the previous week, the EIA reported. The build bucked market expectations for an inventory drop at a time when demand is typically higher as refiners use crude to build product supply, particularly in heating oil, for the winter.

Analysts had expected a crude draw of around 2.2M barrels instead for last week.

“I think refiners just had a slowdown in product putouts last week because the weather hasn’t been cold enough, to necessitate creation of, say, more heating oil,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. 

The start of the 2022/23 winter season has been marked by abnormally high temperatures, with the daily average over the past week at around 45 degrees Fahrenheit (7 Celsius) as opposed to the 35-25 degree Fahrenheit range (around 2 to -2 Celsius) common for this time of year.

Inventories of distillates, which are refined into heating diesel, diesel for trucks, buses, trains and ships and fuel for jets, fell by 1.069M barrels last week, the EIA said, more than the forecast decline of 472,000 barrels. In the previous week, distillate stockpiles fell by 1.427M barrels.

On the gasoline front, inventories rose by 4.114M barrels last week, versus expectations for a build of just under 1.2M barrels. In the previous week, gasoline balances declined by 346,000 barrels. Gasoline is America’s premier automobile fuel.