Oil up 6% as Bulls Back in Play on Benign Inflation Data

© Reuters.

By Barani Krishnan

AiVIF.com -- Oil prices jumped almost 6% on Wednesday, rising for the first time in four sessions and cutting by two-thirds losses on the week, as benign inflation data suggested the Federal Reserve might not go overboard in the near term with rate hikes that could tip the U.S. economy into recession.

Data showing weekly inventories of U.S. crude at seven times higher to expectations and at their highest in four weeks also did little to dissuade oil bulls from making a forceful return to the market.

The focus instead was on last week’s outsized drawdowns in gasoline, as well as the distillates used for producing the diesel required for trucks, buses, trains and ships as well as fuel for jets.

New York-traded West Texas Intermediate, or WTI, the benchmark for U.S. crude, was up $6.35, or 6.4%, at $106.11 by 1:00 PM ET (17:00 GMT). 

WTI had retreated almost 9% earlier this week, hitting a two-week low of $98.65 on worries that the United States might fall into a recession from aggressive rate hikes by a Fed determined to beat inflation growing at its fastest pace in 40 years.

Brent crude, the London-traded global benchmark for oil, was up $5.50, or 5.4%, to $107.96 a barrel. 

Like WTI, Brent had also fallen 9% on the week prior to Wednesday’s rebound, hitting a two-week bottom of $101.31.

“The volatility in crude is staggering as the market is being pulled in both directions; one side by fears of a U.S. recession and the other side by exuberance over the implied demand for fuel ahead of the summer,” said John Kilduff, partner at New York energy hedge fund Again Capital.

U.S. consumer prices rose 8.3% in the year to April, easing slightly from the 8.5% annual growth in March while keeping inflation not far from the four-decade highs, the Labor Department said earlier on Wednesday.

“We're in the process of rolling over from extremely high year-on-year inflation but the shape of that curve is in question,” economist Adam Button said in a post on the ForexLive platform. “Will it be a swift return to 2% inflation or a long, slow process?”

The prospect of returning to 2% inflation is a key focus of the Fed. The central bank has penciled in seven rate hikes this year — the maximum possible under its calendar of monthly meetings in 2022 — and more rate revisions next year to achieve that 2%.

More perplexing to investors is the quantum of rate increases planned by the Fed for each month. As of now, officials at the central bank are debating the viability of a 75-basis point hike in June, after the 50-bps and 25 bps increases in May and March, respectively. A 75-bps hike would represent the largest upward adjustment in rates since 1994.

Aside from the benign consumer price print for April, crude prices were also boosted by the weekly oil inventory data released by the Energy Information Administration or EIA.

The Biden administration pulled a record 7 million barrels of crude from the U.S. Strategic Petroleum Reserve, or SPR, last week, as it kept up with unrelenting draws from the nation’s oil reserve in a bid to bridge a supply deficit and cool all-time highs in fuel prices.

The SPR’s stockpile for the week ended May 6 stood at 543 million barrels from a previous 550 million, which was already the lowest reserve level in 20 years, the EIA said in its Weekly Petroleum Status Report.

The EIA report, released each Wednesday, showed that the Biden administration has taken 3 million barrels on the average out of the SPR every week over the past two months to help meet domestic refiners’ demand for crude.

Global oil supplies are estimated to be in a deficit of five to seven million barrels per day versus demand, largely due to Western sanctions against Russia — one of the world’s largest energy exporters. A surfeit in fuel consumption amid strong economic recovery from the two-year long coronavirus pandemic has also left the market in deficit.

The Biden administration did its first major SPR withdrawal in November as oil supplies began tightening amid an uptick in demand.

Last week’s SPR draw was, however, more than double the weekly trend as the administration entered an era of accelerated reliance on the reserve -- amid average pump prices of gasoline standing at all-time highs of $4.37 per gallon versus the year-ago average of $2.99.

For May through July, the administration has scheduled an SPR release of 180 million barrels — effectively one million barrels a day over 180 days.

The EIA report showed that as the SPR stockpile fell by 7 million barrels last week, the commercial crude inventory level rose by 8.5 million barrels. To the casual observer, it might suggest that the crude leaving the reserve had gone directly into commercial inventories. The EIA, however, says there’s a one-week lag in accounting between the two. 

Notwithstanding the crude draw, consumption of fuel products remained strong last week, with gasoline inventories seeing a slide of 3.61 million barrels versus a forecast draw of 1.6 million barrels and the previous week’s usage of 2.23 million barrels. Gasoline, known as petrol outside of the United States, is America’s premier automobile fuel product.

Stockpiles of distillates fell by 913,000 barrels last week versus forecasts for a draw of 1.0 million, after the previous week’s consumption of 2.34 million.

Distillates have been the strongest growth component of the U.S. oil complex for months, seeing virtually non-stop inventory declines since early January. As a result, pump prices of diesel have also hit record highs, averaging $5.55 a gallon versus the year-ago average of $3.13.

“The Biden administration is determined to use the SPR to the hilt to beat back the inflation in fuel. The reality is we aren’t seeing much reduction in what Americans are paying at the pump,” said Kilduff of Again Capital.

Despite crude’s drop from March highs of above $130, the retail price of gasoline has remained stubbornly at or above $4 per gallon over the past two months, prompting President Joe Biden to accuse energy firms of price-gouging at the pump.