Oil prices rally ahead of US inflation data

Oil prices rallied on Tuesday and WTI price climbed above the $81.4 per barrel level. If the WTI price declines, it may encounter support near $79 per barrel, while resistance may be found near $81.7 per barrel.

Oil prices jumped on a softer dollar and hope that the Federal Reserve might ease up on its policy tightening. The Federal Reserve raised interest rates by only 25 basis points at its meeting in March, bringing the benchmark interest rate to a target range of 4.75% to 5.00%. Market odds currently favor another 25-basis point rate hike at the Fed’s next meeting in May. The much-anticipated US CPI data are due on Wednesday. US Consumer Price Index is forecast to decrease to 5.2% year-on-year in March from 6.0% in February. This week’s inflation data may be the deciding factor for the Fed’s next rate hike and cooling price pressures may tip the odds in favor of a pause in rate hikes.

The recent banking crisis has been driving oil prices down in the past few weeks. The potential of a banking sector meltdown has reduced the oil demand outlook, as recession concerns mount. Fears of a slowdown in the U.S. economy also put pressure on oil prices. Recession concerns run high and aggressive rate hikes stifle economic activity, putting a lid on oil prices. 

Concerns over China’s economic recovery also reduce the oil demand outlook. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. Hopes of economic recovery were revived after the Chinese abandoned its zero-Covid policy. China’s economy remains fragile however and may take longer than anticipated. Chinese inflation data this week showed consumer inflation in March rose at its slowest pace since September 2021. Recent economic data from China point to sluggish economic recovery and weak oil demand.

Oil prices surged last week after OPEC+ producers announced surprise cuts in oil production. The organization decided to reduce output by 1.1 million barrels per day, to offset the drop in oil prices from the global banking crisis. The cuts will start in May and last through the end of the year according to OPEC representatives. The increase in oil prices has re-ignited recession concerns, as the high cost of fuel is likely to increase price pressures.

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Written by:
Myrsini Giannouli

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