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Oil punches higher after US CPI data: more to come?

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While OPEC+’s decision to reduce crude production levels has translated into higher baseline prices, it has failed to lead to a consistent uptrend. Oil prices had remained on a horizontal trend going into Easter with limited performances on one side or the other.

Doubts over demand levels have strongly affected price expectations. The slowdown in economic growth in the US could continue to pull demand to the downside in particular with economic indicators continually missing estimates.

The current trend in interest rate hikes could also be a significantly important factor for oil consumption as it could lead to a weaker economy, a more pessimistic sentiment among households and lower purchasing power. The next few days in the energy market will be key as commodity traders digest US CPI news, but we are already seeing some more bullish movement in the WTI contract.

Concerns around the US banking sector and possibly a credit crunch could play in favour of a softer monetary policy and could push the Federal Reserve to reconsider. A change in policy could leave breathing room for the economy and oil prices.

“The surprise production cut from OPEC+ continues to stoke concerns around inflation,” said Sophie Lund-Yates, an analyst with Hargreaves Lansdown. “There are some outside concerns this could encroach on the $100 mark once more, which would have legitimate ramifications for monetary policy and has already led to a reduction in short positions in oil.”

In terms of the impact for consumers, higher energy bills are not a given at this point, and prices would need to remain elevated for a longer period of time before that conversation takes place.


Let’s not forget about China

“Another important market to consider is China, where below-expectations manufacturing activity has been subduing oil demand projections,” observed Daniel Takieddine, CEO for MENA at  BDSwiss. “The country is the world’s largest oil importer and could drive crude prices up if its economy recovers more strongly.”

In this regard, weaker-than-expected inflation figures could entice the Chinese government to take additional measures to boost the economy. Inflation in the country remains below the central bank’s target, contrary to Western markets where authorities have been struggling with elevated inflation for some time now.

Oil markets could see some volatility after the release of the US Energy Information Administration outlook as well as the American Petroleum Institute’s inventory levels.

Traders could also monitor other economic data to determine changes in monetary policy and their impact on demand levels. Tomorrow’s US inflation figures could also have an important impact on prices and outlook.

Futures hit a two month high last week, also partly driven by a weaker USD. Analysts noted that the RBOB  gasoline crack spread (a measure of refined gasoline prices against crude oil) has been widening slightly.

At time of writing WTI May contract was priced at $83.14 having rallied substantially after the CPI data out of the US on Wednesday. Brent crude June was also up $87.19 after a surge in the price off $85 over the Easter weekend. Murban crude was also trading just north of $87.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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