By Barani Krishnan
Investing.com -- Oil bulls turned a losing week into a neutral one by leveraging upon an unverified report about deep production cuts planned by Russia to send crude prices up a second day in a row, despite U.S. inflation data suggesting the Federal Reserve could turn aggressive again on rate hikes.
The Fed’s preferred inflation indicator — the Personal Consumption Expenditures, or PCE, Index — grew 5.4% in the year to January, beating forecasts for the month as well as its previous growth in December, the Commerce Department reported on Friday.
That was a day after the Energy Information Administration, or EIA, said that U.S. crude stockpiles rose for a ninth straight week, adding a cumulative 60 million barrels to inventories since the end of last year.
Those long oil, however, ignored both the inflation and inventory data, remaining wide-eyed over a Reuters report that Russia will cut crude exports from its western ports by up to 25% in March.
For context, the cut was way above the 5% reduction in output announced by Deputy Prime Minister Alexander Novak two weeks ago.
If true, it would be significant.
But more than 24 hours after it appeared, the report remained unproven, with no comment or verification from a single official in Moscow.
Yet, oil bulls managed to turn around an initial market slump on Friday by hedging on the so-called production cuts story to buy every price dip triggered by the heady inflation in the PCE data.
The dollar hit a seven-week high against a basket of major currencies while the yields on the 2-year U.S. note hit their highest since 2007 amid a near reach of the 4% level for the benchmark 10-Year note.
All these were on the back of expectations that the Fed will resort to more hawkish monetary action amid the “hotter inflation in the U.S.,” economist Greg Michalowski said in a post on the ForexLive forum.
U.S. consumer sentiment, meanwhile, hit a 13-month high in February, according to a survey by the University of Michigan that showed Americans more optimistic about spending at a time the Fed actually needs them to show restraint.
New York-traded West Texas Intermediate, or WTI, crude for April delivery settled up 93 cents, or 1.2%, at $76.32 per barrel. Earlier in the session, WTI fell as much as $1.28. But after the turnaround, the U.S. crude benchmark finished the week down just 2 cents, practically flat.
Brent for April delivery settled up 95 cents, or 1.2%, at $83.16. Brent fell as much as $1.12 earlier in the session. For the week, the global crude benchmark finished up 13 cents, or nearly flat too.
“It’s what you call the ‘buy-on-Friday-so-you-can-sell-on-Monday’ syndrome,” said John Kilduff, partner at New York energy hedge fund Again Capital. “This was a trait we used to regularly see last year when supply was at severe threat in the early days of the Ukraine invasion and sanctions on Russia.”
“Now we have enough prompt oil supply in the U.S. to be swimming in it,” added Kilduff. “The bulls, of course, want to revert to the undersupplied mantra and this unverified report on Russian cuts has given them just the right cover for that. I doubt the long-side of oil can keep doing this if risks to the economy from inflation keep growing.”
Ed Moya, analyst at online trading platform OANDA, had a similar view. “The risks that the Fed will have to send the economy into a recession are growing,” said Moya. “It is getting ugly on Wall Street as risk aversion runs wild and that could keep oil prices heavy.“
Economists had expected the annualized January growth of the PCE to at least match December’s 5%, after aggressive rate hikes by the Fed for almost a year now.
Without volatile food and energy prices, the so-called core PCE Index was up 4.7% during the 12 months to January versus a forecast 4.3% and a previous growth of 4.4% in the year to December.
“The PCE report shows that the Fed needs to do a little more,” Loretta Mester, Fed president for the region of Cleveland, said in comments carried by Bloomberg. “It is gratifying that inflation declined from [its] peak, but more is needed.”
President Joe Biden, in a statement released by the White House, concurred. “Today’s report shows we have made progress on inflation, but we have more work to do.”
The Consumer Price Index, a broader gauge of inflation, stood at a four-decade high of 9.1% for the year to June. It has moderated since to an annualized growth of 6.4% in January. The Fed’s target for inflation is just 2% per year.
“Wage growth is still running too high to be consistent with timely, and a sustainable return to 2% inflation,” Philip Jefferson, a board member at the Fed, said.
To clamp down on runaway price growth, the Fed added 450 basis points to interest rates since March via eight hikes. Prior to that, rates stood at nearly zero after the global outbreak of the coronavirus in 2020.
The Fed’s first post-COVID hike was a 25-basis point increase in March last year. It then moved up with a 50-basis point increase in May. After that, it executed four back-to-back jumbo-sized hikes of 75 basis points from June through November. Since then, it has returned to a more modest 50-basis point increase in December and a 25-basis point hike in February.
Rate expectations for the Fed’s March 22 policy meeting, monitored by foreign exchange traders, remained at 25 basis points on Friday, though it could end up being twice as much amid increasing calls for tighter policing from the central bank’s hawks.