Oil rally cut short by inflation concerns, leftover U.S. reserve sale

There doesn’t seem to be much Valentine love for those long oil.

Stickier-than-expected U.S. inflation and news that the Biden administration plans to sell another 26 million barrels from an unused allocation of the country’s emergency oil reserve brought the week-long rally in crude to a pause on Tuesday.

New York-traded West Texas Intermediate, or WTI, crude for March settled down $1.08, or 1.4%, at $79.06 per barrel. The U.S. crude benchmark hit a session low of $77.48 after a two-week high of $80.61 in the previous session.

London-traded Brent crude for March delivery was down $1.03, or 1.2%, at $85.58. The global crude benchmark hit an intraday bottom of $84.14 after a two-week peak of $86.93 on Monday.

“​​Crude prices are tumbling as more U.S. oil is about to hit the market and as stubbornly high inflation could force the Fed to remain aggressive with its rate hiking campaign,” said Ed Moya, analyst at online trading platform OANDA.

“Oil could be in the danger zone if the bond market selloff intensifies and makes some traders price in deeper recession,” Moya added. “No one has strong confidence with their U.S. growth outlook, which means the market could go from pricing in a ‘soft landing’ to a short & shallow recession or even a ‘classic recession’. Bond yields are sharply rising.”

The yield on the benchmark 10-year U.S. Treasury note hit its highest since Jan. 5.

WTI jumped 9% last week and Brent 8%, responding to production cuts announced by Russia in retaliation to Western sanctions on its oil, as well as hopes for outsized demand from China following an end to tough COVID-19 curbs in the world’s largest crude importer.

That rally, however, came to an abrupt stop on Tuesday after U.S. inflation proved to be stickier than thought in the Labor Department’s latest report on consumer prices.

The Consumer Price Index for All Urban Consumers, known in short as the CPI, rose 6.4% in the 12 months to January, marking the smallest inflationary growth since October 2021. But a larger rise on the month raised questions on how comfortable the Federal Reserve would be in continuing to taper rate hikes.

Monthly CPI rose by 0.5% in January after a 0.1% decline in December. Core month-on-month CPI, which strips out volatile food and energy prices, was up 0.4% in January, unchanged since December.

“This is on the hot side but not a complete shock with some economists flagging upside risks,” economist Adam Button said in a post on the Forex Live forum.

Button said housing numbers flattened out in January while rent declined, gasoline prices held steady and natural gas prices cratered. “So there’s disinflation in the pipeline,” he said, agreeing with a Fed assessment earlier this month that price growth was slowing.

Still, the mixed month-on-month data, especially a 0.7% growth in real weekly earnings that could keep spending high, would likely prompt most economists to ask if the central bank was getting anywhere near to its long-held target on inflation, Button said. “Will that be enough to get inflation back to 2% or will it get stuck at 3-4%?”

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 450 basis points to interest rates since March via eight 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 began with a 25-basis point hike in March, then moved up to a 50-basis point increase in May. After that, it executed jumbo-sized hikes of 75 basis points between June and November. Since then, it has returned to more modest increases of 50 basis points in December and 25 basis points in February.

The Biden administration plans to draw another 26M barrels from the Strategic Petroleum Reserve, or SPR, from what would be a pre-approved sale of crude from the national oil reserve, news services reported late on Monday.

The oncoming SPR withdrawal is part of a congressionally mandated sale lawmakers approved years ago for the current fiscal year, the reports said.

Oil rally cut short by inflation concerns, leftover U.S. reserve sale
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