Oil up 2% again on bull hype over talk of SPR refill, U.S. rate pause

By Barani Krishnan

Investing.com -- Heightened expectations for a pause in U.S. rate hikes led to a 2% rally in crude futures for a second day in a row on Wednesday. 

Oil bulls were also hyped up by speculation that the Biden administration will refill the nation’s heavily drawn down reserve — despite Energy Secretary Jennifer Granholm saying the action will only come at prices per barrel that work for American consumers.

New York-traded  West Texas Intermediate, or WTI, settled up $1.73, or 2.12%, at $83.26 a barrel, extending Tuesday’s 2.2% run-up. The session high for Wednesday itself was a 18-week peak of $83.53.

At its current momentum, WTI was technically placed to rise by another dollar or so before encountering resistance, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“Since our immediate upside target of $83.25 has been met, stability above this zone could take WTI to $83.80, followed by $84.50,” said Dixit.

London-traded Brent settled up $1.72, or 2%, at $87.33, extending Tuesday’s 1.7% gain. Brent’s session high for Wednesday was $87.48.

Oil rallied as a senior official at the Federal Reserve said the central bank might not need to raise interest rates on a monthly basis anymore as inflation in the United States appears to be cooling.

“We don’t keep raising interest rates till we get to 2%,” San Francisco Fed President Mary Daly said, referring to the central bank’s target versus actual inflation at 5%. “We don’t keep raising interest rates with blinders on. Policy tightening has reached a point where we do not expect rates to be raised at every meeting.”

Daly’s remarks came after the latest data showed U.S. consumer prices cooled for the year to March, growing about one percent below February levels, even as core prices minus food and energy remained stubbornly higher, indicating mixed results for the central bank’s fight against inflation.

The Consumer Price Index, or CPI, grew at an annual rate of 5% last month versus a forecast 5.2% and against February’s 6%. For the month itself, March CPI was up 0.1% versus a forecast 0.2% and against February’s 0.4%.

But core CPI, which strips out food and energy prices, expanded as forecast by an annual 5.6% versus February’s 5.5%. For the month, core CPI grew by a slower 0.4% for March as forecast, versus 0.5% for February.

“Traders and analysts continue to look for lower shelter costs to start to kick in,” economist Greg Michalowski said in a post on the ForexLive forum, referring to one of the elements of higher inflation that was worrying the market.

The Fed has raised rates by 475 basis points over the past 13 months, taking them to a peak of 5% from just 0.25% after the COVID-19 outbreak in March 2020. 

While it is still early to anticipate what the Fed will do at its next rate decision in May, some economists are pricing in another hike of 25 basis points based on the relatively steady jobs growth for March, which came in less than 100,000 below February’s level.

Others, influenced by the latest CPI data, think the Fed might actually call for a pause. “The Fed has tools and can absolutely reduce inflation,” Daly said, pointing out that even without rate hikes, there is “a lot more monetary policy tightening in the pipeline.”

“When credit conditions tighten, the economy slows, reducing the need for the Fed to tighten further,” Daly added. “There is a lot of uncertainty about how long it will take for rate hikes to have an effect on the economy. The CPI release revealed good news, but the level remained elevated.”

Crude futures also got a boost from speculation that the Biden administration will refill the U.S. Strategic Petroleum Reserve, or SPR, which was at near four-decade lows.

The administration hopes to refill the SPR at prices that are “advantageous to taxpayers” during the rest of the year, Energy Secretary Granholm said. The second part of the statement was, however, lost in a bullish market that ran off to the races with the headline about the refill.

“It’s not surprising that oil bulls conveniently chose to leave out the caveat over ‘advantageous prices’ to facilitate a refill,” said John Kilduff, partner at New York energy hedge fund Again Capital. “To me, it’s more like a LOL moment.”

The Biden administration has leaned heavily on the SPR since late 2021 to offset tight crude supplies that had raised fuel costs for Americans. As of last week, the SPR’s crude balance was at its lowest since November 1983. 

In the latest week to April 7, the administration released 1.6 million barrels from the SPR, after a 3.7M-barrel draw during the prior week to March 31.

As a result, the crude balance in U.S. storage rose by 0.597M barrels during the week ended April 7, the EIA said in its Weekly Petroleum Status Report. In the previous week to March 24, crude stockpiles tumbled by 3.739M barrels after a prior draw of 7.489M barrels.

Analysts tracked by Investing.com had expected the EIA to report a crude balance decline of 0.583M barrels instead. 

But demand for fuel also slackened last week, EIA reported. That weakened the debate on whether the reserve pull had a biased negative impact on the report.

On the gasoline inventory front, the EIA cited a modest draw of  0.331M barrels versus the forecast drop of 1.6M barrels, and against the previous weekly decline of 4.119M barrels. Automotive fuel gasoline is the No. 1 U.S. fuel product.

With distillate stockpiles, the EIA reported a 0.606M barrel draw, against expectations for a drop of 0.764M barrels and versus the prior week’s consumption of 3.632M. Distillates are refined into heating oil, diesel for trucks, buses, trains and ships and fuel for jets.