Crude oil turns positive after U.S. inflation surprise

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By Peter Nurse   

AiVIF.com -- Oil prices climbed Thursday, helped by dollar weakness after U.S. inflation cooled in October, raising hopes that the Federal Reserve will ease its monetary policy tightening more quickly than previously expected.

By 09:05 ET (14:05 GMT), U.S. crude futures traded 0.3% higher at $86.11 a barrel, while the Brent contract rose 0.4% to $93.06.

Data released earlier Thursday show headline CPI advanced 0.4% last month, up 7.7% from a year ago, a nine-month low. Encouragingly, core CPI, which excludes food and energy, increased only 0.3% from the prior month, with the annual rate decelerating from a four-decade high in September to 6.3%.  

At the same time, the number of Americans filing for unemployment insurance grew by more than expected last week, rising 225,000, increasing from an upwardly revised previous reading of 218,000.

With inflation showing signs of cooling and stress growing in the labor market, traders are betting that the U.S. central bank will only hike by 50 basis points in December, instead of the 75 bps originally anticipated.

This has hit the U.S. currency, with the Dollar Index, which tracks the greenback against a basket of six other currencies, trading 1.4% lower at 108.898, the lowest level since mid-September.

A weaker greenback makes dollar-denominated commodities, including oil, cheaper for foreign investors to buy, boosting demand.

This news helped turn the crude market around, after oil had extended losses earlier Thursday for a fourth consecutive session, weighed by concerns about fuel demand in China, the world’s biggest importer, following a surge in COVID cases.

Several cities in China, including the manufacturing hub of Guangzhou, are battling a rebound in infections, and Chinese health authorities have made it clear of late that they have no intentions of ending the country’s very restrictive mobility restrictions used to combat the spread of the virus.

The rise in U.S. crude oil stockpiles of 3.9 million barrels last week, according to data from the Energy Information Administration released Wednesday, taking inventories to their highest since July 2021, also weighed. 

The bulk of this increase, however, could be put down to a roughly 3.5M barrel drawdown from the Strategic Petroleum Reserve.

The supply situation remains very tight, especially after the Organization of Petroleum Exporting Countries and its allies agreed to reduce supply, and with the European Union set to tighten curbs on Russian flows.

“We now expect the combined effects of the OPEC+ cuts and EU embargo on Russian oil to be predominantly felt in 1Q23 rather than 4Q22,” said analysts at HSBC, as “we expect negative market sentiment to limit upside potential for the rest of this year.”

The bank trimmed its Brent price forecast for the fourth quarter of 2022 by $5 a barrel to $95/bbl, but lifted its forecast for the first quarter of next year to $100 a barrel.