Oil Down 7% on Week Amid U.S. Inflation, Rate Hike Woes

By Barani Krishnan

Investing.com -- The long-oil crowd would have probably expected a longer period of joy from OPEC+’s much-hyped production cut.

But three days of relentless selling since last week’s momentous run has caused more consternation than thought in crude markets as sticky U.S. inflation data led to another round of heightened Fed rate hike fears.

A U.S. Labor Department report on Wednesday showed wholesale prices grew beyond economists’ estimates in September, setting up the likelihood that consumer price data due a day later would be just as challenging for the Fed in battling inflation.

And right on cue, Minneapolis Fed President Neel Kashkari said the central bank was “dead serious” in overcoming inflation and that the bar is “very high” for the central bank to consider a slowdown or pause in its monetary tightening.

If the U.S. economy entered a steep downturn, the Fed could always halt its rate hikes, or slow them, especially if there were signs that inflation was coming down rapidly, Kashkari said.

He, however, added: “For me, the bar for such a change is very high because we have not yet seen much evidence that the underlying inflation — the services inflation, the wage inflation, the labor market  — that that is yet softening.”

The bearish news wasn’t just on the economy.

Both OPEC and the U.S. Energy Department slashed their latest demand outlooks for energy. Last week, the 13-member Saudi-led Organization of the Petroleum Exporting Countries and its 10 Russian-steered allies — together known as OPEC+ — sent crude prices up 17% by announcing a 2-million-barrel-per-day production cut. 

On Wednesday, OPEC slashed up to 2.64 million bpd from its demand, citing the resurgence of China's COVID-19 containment measures and high inflation.

"The world economy has entered into a time of heightened uncertainty and rising challenges," OPEC said in its monthly report.

The Energy Department in Washington, meanwhile, lowered its expectations for both production and demand in the United States. It now sees just a 0.9% increase in consumption in 2023, down from a previous forecast for a rise of 1.7%. Crude production is expected to grow by 5.2%, down from the 7.2% previously forecast.

“There are two dominant forces in the oil market at the moment; the economic outlook being the primary downside risk and OPEC+ the upside,” Craig Erlam, analyst at online trading platform OANDA, wrote in a market commentary. “The latter reasserted itself last week with the two million barrel per day cut (much less in reality, of course) but growth fears are still dominating in the markets which may stop the price from taking off.” 

The Dollar Index and U.S. bond yields, benchmarked to the 10-year Treasury note, jumped on the inflation data and hawkish Fed talk, adding to the pressure on oil and other dollar-denominated commodities.

New York-traded West Texas Intermediate crude settled down $2.08, or 2.3%, at $87.27 per barrel, extending the week’s slide by nearly 7%. The U.S. crude benchmark rose 17% through last week, registering a powerful start for October, after a 12.5% drop in September and a 24% loss for the third quarter.

Brent oil settled down $1.84, or 2%, at $92.45 per barrel, extending the week’s slide to over 6%. Brent rose 11% last week, making up all of September’s loss and recovering partially from its 22% loss in the third quarter. 

Market participants were also 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 ET (20:30 GMT) a snapshot of closing balances on U.S. crude, gasoline and distillates for the week ended Oct. 7. The numbers serve as a precursor to official inventory data on the same due from the U.S. Energy Information Administration on Thursday.

For last week, analysts tracked by Investing.com expect the EIA to report a crude stockpile build of 1.75 million barrels, versus the 1.36-million barrel reduction reported during the week to Sept. 30.

On the gasoline inventory front, the consensus is for a draw of 1.825 million barrels over the 4.728 million-barrel decline in the previous week.

With distillate stockpiles, the expectation is for a drop of 2.05 million barrels versus the prior week’s deficit of 3.44 million.