Oil resumes drop on U.S. inflation, rates chokehold

By Barani Krishnan

Investing.com -- ‘Same old, same old’ - That’s the story in oil as U.S. inflation and rate hike concerns continue to be a bugbear for longs in the game.

Crude prices resumed their grind lower on Tuesday as concerns over global growth overwhelmed the optimism some in the market had over the end of COVID controls in top oil importer China.

New York-traded West Texas Intermediate, or WTI, crude for March settled down 18 cents, or 0.2%. at $76.16 per barrel. The U.S. crude benchmark has fallen in three of the past four weeks, losing nearly 7% in that stretch.

London-traded Brent crude for March delivery settled down $1.02, or 1.2%, at $83.05. The global crude benchmark, like WTI, has Brent has slid in three of the past four weeks, losing more than 5% in that period.

“Central banks globally are about to take policy into even more restrictive levels and that is countering China’s reopening momentum,” said Ed Moya, analyst at online trading platform OANDA.

“Crude prices are struggling as global growth concerns return after soft European manufacturing activity data is accompanied with a surge in global bond yields.”

WTI and Brent, which slumped about 4% or more last week, rebounded somewhat in Monday’s scarcely-traded session, with U.S. market participants mostly away for the President’s Day holiday. 

With Tuesday’s session back at full strength, traders focused largely on the Federal Reserve’s minutes of its February policy meeting due on Wednesday. 

The minutes will provide investors an insight into what Fed policy-makers were thinking when they authorized a second straight slowing of rate hikes since December. The February hike of 25 basis points compared with December’s 50-basis point increase and November’s 75-basis point jump. 

Personal income and spending data, due on Friday, will likely keep the Fed on its toes over inflation and the need for accordingly higher rates, analysts say, even after a drop in existing home sales in January.

New York Fed president John Williams is also due to speak about inflation at an event on Wednesday.

That aside, there will be revised data on fourth quarter gross domestic product and a weekly report on initial jobless claims on Thursday. 

The slowing in rates over the past two months came before a surprise spike in U.S. inflation readings. 

A blowout U.S. non-farm payrolls report for January, released two days after the Fed rate decision on Feb. 1, prompted investors to reevaluate expectations for how high the central bank will ultimately raise rates.

The latest Producer Price Index, issued Thursday, showed that wholesale prices rose by the most in seven months in January. 

According to interest-rate futures, the Fed could take rates to peak above 5.2% by July, from a current high of 4.75%.

Since Beijing announced at the start of the year that it was doing away with all COVID controls, the long-oil world has been salivating over what that could mean for demand in the largest importer of the commodity. 

Even the Paris-based International Energy Agency, which looks after the interest of oil-consuming nations, has been waxing lyrical about how Chinese buying could exponentially remake this year’s oil market.

The IEA, as it’s called, forecast an additional 500,000 barrels per day of consumption from China this year that would take global oil demand to a record high. “Global oil demand is set to rise by 1.9 million bpd in 2023, to a record 101.7M bpd, with nearly half the gain from China following the lifting of its COVID restrictions,” the agency said in its January market report. 

Notwithstanding the positive forecast, the IEA is typically labeled by oil bulls as the “permabear” of demand — due to the agency’s bias towards energy-consuming countries which are often seeking the lowest possible prices.

The problem though with what the long-side of oil wants is there has to be enough hard data to support it. 

Analysts say Chinese import data supporting a major oil rally will likely not emerge for at least another two weeks. Meanwhile, latest available data showed the world’s largest crude importer bought 10.98M bpd, or barrels per day, in January, down from December's 11.37M bpd and November's 11.42M bpd.

The government in Beijing declared a “decisive victory” on Friday in its battle against COVID, claiming it had created “a miracle in the history of human civilization” in successfully steering China through the global pandemic. In the absence of hard numbers, such statements could only have a fleeting impact, analysts said.