Oil prices swing on faster-than-expected rise in US August inflation

Rally in crude prices lost momentum after three days of gains on improved 'risk appetite'

An oil pump jack in Texas. Crude trade has remained volatile this year. Reuters

Oil prices swung sharply on Tuesday after a faster-than-expected rise in August inflation data, which will guide the US Federal Reserve's interest rate decision this month, took steam out of its three-day rally.

Crude prices rose earlier during the day on fading prospects of Iran nuclear deal and weakness in dollar index.

However, the Labour Department consumer price index (CPI) report showed monthly CPI rose 0.1 per cent in August from July, against expectation of a 0.1 per cent contraction. Although consumer prices edged down slightly to 8.3 per cent year-on-year, they were ahead of the 8.1 per cent expectation.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.60 per cent lower at $93.44 per barrel at 6.17pm UAE time after rising more than 1 per cent earlier during the session.

West Texas Intermediate, the gauge that tracks US crude, was down 0.27 per cent at $87.54 a barrel.

Brent futures rallied for a third day on Monday, settling 1.25 per cent higher, while WTI added 1.1 per cent on the first day of trading this week as the US currency eased from last week’s highs.

However, The Bloomberg Dollar Spot Index turned positive and rose 0.6 per cent after the latest data was released.

"The US inflation numbers have confirmed that inflation is still running hot in the US. This has made the situation a lot more difficult for the Fed who have been trying their best to tame inflation," Naeem Aslam, Chief Market Analyst at Avatrade said.

"The data has confirmed that the Fed’s bullets aren’t killing inflation and this is going to be a concern for many traders."

Brent, which gained 67 per cent last year, has retreated after climbing to a notch under $140 a barrel in March after Russia began its military assault in Ukraine.

Trading has remained volatile amid the weakening global economic outlook, demand concerns and rising interest rates.

Lockdowns across China that are affecting about 65 million citizens in the world's second-biggest oil consumer also remain a concern for energy markets.

Beijing reported in July that the country's economy grew at its slowest pace since the onset of the coronavirus outbreak in Wuhan.

“Anxiety over China’s consistent use of Covid-zero measures will remain a headwind for oil prices, as will a strong dollar,” Emirates NBD said in a research note on Tuesday.

The US dollar, in which oil is priced, hit a record high on Wednesday against major currencies, amplifying inflationary pressures. On Thursday, the European Central Bank raised interest rates by a record 75 basis points in an attempt to tame inflation.

The Fed is now likely to make a third consecutive 75 bps interest rate increase when it meets on September 21 to control inflation which has hit a 40-year high.

However, the Fed’s hawkish policy has stoked fears of a recession as aggressive rate increases will significantly slow economic momentum and dent demand for crude.

“The Fed is almost fully expected to raise the rates by another 75 bps at next week’s FOMC [Federal Open Market Committee] meeting. What will happen after is, however, up to the data,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said ahead of inflation data release.

Crude’s recent swings have come amid concerns of additional barrels of crude coming to the market in the event of Iran reaching a nuclear deal with US and its western allies.

However, US Secretary of State Anthony Blinken said this week that it was unlikely that Washington and Tehran could strike a new deal any time and described Iran’s proposals as “clearly a step backward”.

“Optimism that a deal can be reached has faded in the last few weeks, pushing against expectations that Iranian crude could help to offset disruptions to Russian exports,” Emirates NBD said.

However, Edward Moya, senior market analyst at Oanda, said the oil market still remained tight and appeared poised for further shortages as growth outlooks globally appear to be improving.

“European risks could be peaking this winter and China’s cyclical risks are very short-term,” he said. “Demand destruction calls have been overdone and oil seems like it could be poised to make a run back above the $100 a barrel level.”