Investing.com -- The inflation/Fed rate hike rhetoric has stepped up again with the imminent release of U.S. consumer price data, and the oil market seems to be paying for it more than other risk assets.
New York-based West Texas Intermediate, or WTI, crude settled down 87 cents, or 1.2%, at $72.99 per barrel, giving back a little of last week’s rally of 4.6% that took it to a month high of almost $74.
London-based Brent finished the U.S. trading session down 78 cents, or 1%, at $77.69 after last week’s 4.8% gain and one-month high of $78.53.
“Oil will struggle this week if inflation readings in the U.S. support the hawkish case for a couple more rate hikes, while Euro-area industrial production remains lackluster,” said Ed Moya, analyst at online trading platform OANDA.
“A bullish backwardation structure should help WTI crude find a home above the $70 level, but it seems unlikely that the demand outlook will get any good news this week.”
Crude prices slid after San Francisco Fed President Mary Daly reaffirmed talk that the Federal Reserve will probably need two more rate hikes this year to continue its fight against inflation although the pace of the central bank’s monetary tightening also needs to be slowed to preserve growth.
“We may end up doing less or more than a couple rate hikes this year, depending on the data,” Daly said in a live-streamed discussion on the economy and interest rates. “Today, with the labor market still strong, the risks of doing too little [with inflation] are outweighing the risks of doing too much. But it's appropriate to slow [the] pace of rate hikes.”
Inflation worry spikes ahead of CPI
Daly’s remarks came ahead of Wednesday’s release of the Consumer Price Index, or CPI, report for June, which economists said was likely to have grown 3.1% on the year.
Inflation, as measured by the CPI, hit 40-year highs in June 2022, expanding at an annual rate of 9.1%. Since then, it has slowed, growing at just 4% per annum in May, for its slowest expansion in two years. The Fed’s favorite price indicator, the Personal Consumption Expenditures, or PCE, Index, meanwhile, grew by 3.8% in May.
The Fed’s tolerance for inflation is, meanwhile, just 2% per annum. In response to the runaway price growth since the end of the coronavirus pandemic in March 2022, the central bank has raised interest rates by 10 times, adding a total of 5% to the previous 0.25%. While the Fed paused its rate hike cycle last month, there is speculation it could resume that when it meets on July 26 for its next rates review.
Despite the smaller-than-forecast job growth, wages of Americans as a whole expanded by 0.4% in June from a 0.3% growth in May even as the unemployment rate dropped 3.6% from a previous 3.7%. The Fed has insisted that both job numbers and wages have to drop appreciably for it to discontinue rate hikes on a longer term.
Daly’s colleague, Loretta Mester, who’s president of the Cleveland Fed, told a separate event on Monday that she still regarded inflation as “stubbornly high”.
“Wages pressures remain too high to get inflation back to 2%,” said Mester, who admitted that she had wanted a rate hike — rather than a pause — in June.
But like Daly, Mester thought the Fed was making progress in its fight against inflation and that rate tightening had to be slowed at some point to preserve growth.
The economy, measured by real gross domestic product, grew by an annualized 2% in the first quarter of this year, the Commerce Department said last week in a report that also signaled that the Fed’s rate hikes had triggered a recession as yet.
Moya of OANDA noted there were push-pull in both directions for oil, with short-sellers holding the upper hand.
“China is rushing to deliver more support to their real estate crisis, while the U.S. starts to grow more nervous about a potential recession,” said Moya. “Oil will struggle this week if inflation readings in the U.S. support the hawkish case for a couple more rate hikes, while Euro-area industrial production remains lackluster.”
China weighs on oil; OPEC+ action lifts
Factory-gate prices in China fell at the fastest pace in seven-and-a-half years in June, data showed on Monday. Chinese consumer inflation was also at its slowest since 2021, adding to the case for policymakers to use more stimulus to revive sluggish demand.
Still, the downside in crude was limited by output cuts promised by Saudi Arabia and Russia under their OPEC+ alliance of oil producers.
"The beginning of July and the implementation of a Saudi production cut help trigger short covering in WTI and fresh buying of Brent," Ole Hansen, head of commodity strategy at Saxo Bank, said in comments carried by Reuters.
Money managers stepped up net long positions in oil futures and options contracts in the latest weekly data, a Reuters report noted.
"Overall, the combined net long increased by 49,000 contracts to 280,000, still within the range that has prevailed during two months of range-bound trading," the report quoted Hansen as saying.
Moya of OANDA concurred. “Recession risks might rise, but it seems energy traders are confident OPEC+ will keep supplies tight.”