Oil Edges Lower, But Underpinned Above $90 by Soft U.S. CPI

By Ambar Warrick 

Investing.com-- Oil prices fell slightly on Thursday, but retained most of their recent gains as softer-than-expected U.S. inflation data drove expectations of a smaller rate hike by the Federal Reserve.

As of 2011 ET (0011 GMT), U.S. benchmark WTI Futures fell 0.6% to $91.37 a barrel, while British-traded Brent oil futures fell 0.1% to $96.91 a barrel. U.S. futures had rallied 1.1% on Wednesday, while the British benchmark added 0.5%. 

Prices rallied off weekly lows on Wednesday after the U.S. consumer price index showed that inflationary pressures eased in July- a result of a series of interest rate hikes by the Federal Reserve to contain runaway prices.

The dollar index slumped after the reading, as investors began penciling in a 50 basis point rate hike by the Fed during its September meeting. Initial expectations were for a 75 basis point hike. 

A slower pace of monetary policy tightening, coupled with easing inflation is expected to take off some pressure on U.S. economic activity, which could spur a recovery in crude demand. 

Additionally, concerns over a supply crunch in Europe, stemming from Ukraine halting the Druzhba oil pipeline from Russia, had also supported prices. But exports to Europe are expected to resume soon. 

But in the near-term, oil likely faces a supply glut amid waning demand in major economies. U.S. government data on Wednesday confirmed that crude oil inventories grew substantially more than expected in the past week, indicating that demand has remained subdued. 

Inventories rose by 5.458 million barrels in the week to August 5, well above analyst estimates for a build of 73,000 barrels. Crude stockpiles had also unexpectedly risen by nearly five million barrels in the prior week. 

Weak factory activity in China, as seen by sluggish PMIs and a drop in producer price inflation, also indicates that crude demand in the second-largest economy will remain subdued. 

Data on U.S. factory price inflation, due at 0830 ET on Thursday, will show whether inflationary pressures on U.S. industries are easing. 

The reading is expected to mirror a drop seen in consumer prices.