By Barani Krishnan
Investing.com -- The Russian crude production cut is no longer news ahead of the biggest report on U.S. inflation. But oil bulls still fought to keep the market in the green on Monday by bidding to buy crude at the day’s lows.
New York-traded West Texas Intermediate, or WTI, crude for March settled up 42 cents, or 0.5%, at $80.14 per barrel, extending last week’s rally of almost 9%. The U.S. crude benchmark earlier fell to a session low of $78.45. WTI’s intraday peak of $80.61 was the highest in two weeks.
London-traded Brent crude for March delivery finished the regular session up 22 cents, or 0.3%, at $86.61, extending last week’s run-up of 8%. Brent’s session low was $85.11, versus a high of $86.93.
Oil came under pressure earlier on Monday as investors across markets braced for a worrisome Consumer Price Index, or CPI, report due on Tuesday.
On an annual basis, the CPI is forecast to have grown by just 6.2% year-on-year in January from a comparative 6.5% in December. Core CPI, which excludes volatile food and energy prices, is also expected to have slowed for the year with an expansion of 5.5% from a previous 5.7%.
There’s a problem with the annual readings though, analysts say.
Since base effects are likely to distort yearly measurements of price growth, market participants are likely to lean in equal measure — or perhaps more — on monthly Core CPI. That is forecast to have remained flat since December’s 0.4% increase, but a growing number of analysts are leaning towards a higher reading.
Core CPI isn’t the only number markets are watching. In December, the services less energy services’ component of the CPI came in at +0.5%. Since this is the specific component of inflation that the Fed pays close attention to, a big increase in January, around 0.7% or 0.8%, could provide a boost to the dollar — even if the Core CPI comes in near the market expectation and vice versa.
Such market positioning suggests the potential for the dollar to rally on Tuesday. Any rally in the U.S. currency will weigh on commodities led by oil and gold. Higher inflation prints also complicate the narrative of the Federal Reserve seeking smaller interest rate hikes in 2023.
“If inflation is scorching hot, we could see a make-or-break moment in the dollar as more Fed rate hikes get priced in,” said Ed Moya, analyst at online trading platform OANDA. “The crude demand outlook is still holding onto hopes that the U.S. economy could still have a soft landing, but a hot inflation report might trigger more recession calls.”
Last week’s rally in oil was supported by Russia’s announcement that it will cut 500,000 barrels per day from its March production, accounting for 5% of its output. The move came after the Kremlin’s finances were squeezed over the past two months by a G7 price cap of $60-per-barrel on Russian crude that came into force on Dec. 5.
The G7 price cap, meant to limit funding for Moscow’s war against Ukraine, came on top of a maze of Western sanctions already imposed against Russian businesses and individuals over the past year. Latest in the anti-Russia measures was a European Union ban on all forms of Russian energy since Feb. 5 and the G7’s new cap on Russel fuel, comprising of a $100-limit on diesel and a $45-ceiling on fuel oil and naphtha.
“Momentum from the Russian crude output cut appears to be over as traders fixate over the demand outlook,” OANDA’s Moya said, adding that a Bloomberg report on global passenger jet fuel demand rising 0.5% week-on-week helped crude pull back from Monday’s losses.