Oil Dips as Dollar Regains Mojo on U.S. Inflation/Rate Hike Read

By Barani Krishnan

Investing.com -- It’s hard to keep the dollar down — and oil rallying — when inflation data suggests the Fed isn’t doing enough with interest rates.

Crude prices dipped on Tuesday, snapping a three-day rebound from seven-month lows, after the latest reading on the U.S. Consumer Price Index, or CPI, came in above expectations. 

Prices grew by 8.3% in the year to August, slowing for a second month in a row, the CPI data showed. But economists had only expected an annualized growth of 8.1% last month, and said the pace of retreat was unlikely to be enough to stop the Fed from approving another substantial rate hike in September to fight inflation.

The Dollar Index, which pits itself against six major currencies led by the euro, hit an intraday high of 109.49, rising for the first time in five sessions, bolstered by the CPI data and the more hawkish interest rate expectations that spawned.

“A high CPI print raised the odds of a higher-for-longer [rates] scenario at the Federal Reserve,” economist Adam Button said in a comment posted on the Forex Live forum.

The Fed’s target for inflation is a mere 2% a year and it has vowed to raise interest rates as much as necessary to achieve that.

The Fed has raised rates by 225 basis points in four increases since March, with two back-to-back 75 basis point hikes in June and July. Money market traders expect a third 75-basis point increase when the central bank meets on September 21 to decide on rates.

New York-traded West Texas Intermediate, which serves as the U.S. crude benchmark, settled down 47 cents, or 0.5%, at $87.31 per barrel. It had risen a cumulative 7% in three prior sessions, rebounding from a near eight-month bottom of $81.20 hit last week. 

Brent, the London-traded global benchmark for oil, settled down 83 cents, or 0.9%, at $93.17 per barrel. Like WTI, Brent had rallied almost 7% in the three previous sessions, after hitting a seven-month bottom of $87.25 last week.

The downside in crude prices was blunted somewhat by an OPEC report on Tuesday that stuck to an earlier forecast by the oil exporters cartel for robust global oil demand growth in 2022 and 2023.

Oil demand will increase by 3.1 million barrels per day (bpd) in 2022 and by 2.7 million bpd in 2023, unchanged from last month, the Organization of the Petroleum Exporting Countries (OPEC) said in a monthly report that indicated major economies were faring better than expected despite headwinds such as surging inflation.

Aside from the CPI/rate hike concerns and the OPEC read on oil demand, crude traders were on the lookout for U.S. weekly oil inventory data, due after market settlement from API, or the American Petroleum Institute.

The API will release at approximately 16:30 PM ET (20:30 GMT) a snapshot of closing balances on U.S. crude, gasoline and distillates for the week ended Sept 9. The numbers serve as a precursor to official inventory data on the same due from the U.S. Energy Information Administration on Wednesday.

For last week, analysts tracked by Investing.com expect the EIA to report a crude stockpile build of 833,000 barrels, extending the 8.844-million barrel rise reported during the week to Sept. 2.

On the gasoline inventory front, the consensus is for a draw of 858,000 barrels over the 333,000-barrel build in the previous week.

With distillate stockpiles, the expectation is for a climb of 600,000 barrels versus the prior week’s gain of 95,000 barrels.