Oil up 6% on week as U.S. inflation cools, pipeline outage continues

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By Barani Krishnan

AiVIF.com -- The closure of a Canada-to-U.S. pipeline was already helping oil build back from last week’s worst selloff in nine months before Tuesday’s relatively-benign inflation data that suggested smaller U.S. rate hikes going forth.

The result was a rally of 3% or more in U.K.-origin Brent oil and U.S. West Texas Intermediate, or WTI, crude for a second day in a row. That set the two benchmarks up about 6% on the week, recovering about half of last week’s plunge of almost 12%.

Brent crude was up $2.90, or 3.7%, trading at $80.89 by 13:45 ET (18:45 GMT). On Monday, it rose 2.4%. The global crude benchmark fell $9.47, or 11% last week, hitting a low of $75.14 — a bottom not seen since Dec 23, 2021. 

WTI for January delivery was up $2.63, or 3.6%, reaching $75.80. On Monday, WTI rose 3%. The U.S. crude benchmark ended last week down $9.28, or 11%, making it its worst week since the week ended March 25. WTI’s session low for last week was $70.11 — a bottom not seen since Dec 21, 2021. 

The rally in oil came amid the continued closure of the Keystone pipeline carrying Canadian heavy crude to the U.S. Gulf Coast of Mexico.   

There was no timeline on how long it would take Canada's TC Energy (NYSE:TRP) Corp to clean up and restart the pipeline where more than 14,000 barrels of oil leaked last week, forming the largest U.S. crude oil spill in nearly a decade.

TC Energy shut the pipeline after the spill was discovered late last Wednesday in Kansas. The company told officials in Washington County, Kansas, that they have not yet determined the cause and were excavating around the 622,000 barrel-per-day Keystone line, a critical artery shipping heavy Canadian crude to U.S. refiners. The outage is expected to shrink supplies at the Cushing, Oklahoma storage hub, delivery point for benchmark U.S. crude oil futures, Reuters reported.

Risk appetite in oil got a further boost on Tuesday as the dollar tumbled after U.S. consumer prices showed the smallest growth in almost a year in November, marking a victory for the Federal Reserve’s plans to slow down rate hikes after aggressively hiking them in recent months to curb price pressures.

Economists had expected the Consumer Price Index for All Urban Consumers, known in short as the CPI, to expand by 7.3% in the year to November versus its annual growth of 7.7% in October.

“This was the smallest 12-month increase since the period ending December 2021,” the Labor Department said in a statement.

The CPI hit a 40-year high in June when it grew at an annual rate of 9.1%. Since that peak, it has slowed every month, giving back a full 2% over the past five months.

“The previous report surprised to the downside,” economist Adam Button said in a post on the ForexLive forum, referring to the 0.5% annual drop for October. “This isn't quite as big of a surprise but it's in the same direction” in prodding the Fed to slow down on its rate hikes, said Button.

The Fed's target for inflation is just 2% per annum. In a bid to control surging prices, the central bank has added 375 basis points to interest rates since March via six rate hikes. Prior to that, interest rates peaked at just 25 basis points, as the Fed slashed them to nearly zero after the global COVID-19 outbreak in 2020.

The Fed, which executed four back-to-back jumbo rate hikes of 75 basis points from June through November, is now contemplating a 50-basis point increase at its Dec.14 rate decision.

More important than that is what the next rate hike for February 2023 is looking like: early indications by money markets on Tuesday suggested a 25-basis point hike. If true, it will match the March increase that began the Fed’s series of rate hikes for 2022.