Crude Oil Lower After U.S. Inflation Surprise; More Rate Hikes Feared

By Peter Nurse   

Investing.com -- Oil prices fell Tuesday after stronger than anticipated U.S. inflation figures boosted the dollar on renewed expectations of further aggressive U.S. rate hikes, potentially curbing economic activity.

By 09:10 ET (13:10 GMT), U.S. crude futures traded 0.3% lower at $87.56 a barrel, while the Brent contract fell 0.4% to $93.54. 

U.S. Gasoline RBOB Futures were up 0.4% at $2.4548 a gallon.

The oil market's structural outlook remains one of tightness, particularly as the war in Ukraine continues and Western powers look to punish Russia for its role in the conflict by limiting the supply of its crude and gas.

However, the crude market has plunged by around a third since peaking in early March following Russia’s invasion of Ukraine on fears that aggressive monetary tightening by a number of major central banks, and the Federal Reserve in particular, to combat soaring inflation will lead to recession and significant demand destruction.

The latest U.S. inflation report added to these fears, as it turned out stronger than expected yet again in August, paving the way for another big hike in interest rates from the Federal Reserve when its policy-makers meet next week.

The consumer price index rose 0.1% in August, up 8.3% from a year earlier, while the so-called 'core CPI' rose a thumping 0.6%, twice what was expected, driving the annual core inflation rate up to 6.3% from 5.9% in July. That's the highest it's been since March.

The U.S. dollar jumped as a result, gaining more than a cent against the euro, making crude instantly more expensive for foreign buyers as the commodity is denominated in bucks.

Concerns about the economic outlook in Europe were on full show earlier Tuesday as the German ZEW economic sentiment index took another plunge to its lowest level since 2008.

Also weighing on the commodity’s outlook is the COVID situation in China, the largest importer of crude in the world, as the country seems unable to gain control of the virus, with lockdowns still in place in a number of cities. This is limiting travel ahead of China’s ‘Golden Week’, a prolonged holiday at the start of October.

Morgan Stanley has cut its price outlook for the third quarter by $12 a barrel to $98 and for the fourth quarter by $5 to $95, while UBS reduced its year-end forecast for Brent by $15 a barrel to $110.

Aside from the U.S. inflation report, traders will focus on the publication of OPEC’s monthly report, for clues on how the group of top producers see the outlook for demand progressing, while the release of American Petroleum Institute inventory data for last week is due at 16:30 ET (20:30 GMT).