Oil prices were largely steady on Wednesday as traders remained cautious ahead of a closely watched U.S. inflation report, while prices still hovered near a four-month high. At 20:58 ET (01:58 GMT), Brent oil futures were unchanged at $79.95 a barrel, while crude oil WTI futures expiring in March inched up 0.1 percent to $76.45 a barrel. Oil had rallied at the start of this week and reached a four-month high on Monday after the Joe Biden administration introduced a comprehensive sanctions package aimed at cutting into Russia’s oil and gas revenues. This sparked concerns over tightening supply and the potential for increased demand from alternative sources, with analysts suggesting sanctions could push the price of Brent up to $90 per barrel.
Read more: Oil prices decline to $80.77 from four-month high amid U.S. sanctions on Russian exports
Traders cautious ahead of U.S. CPI
Traders are exhibiting caution ahead of the upcoming U.S. Consumer Price Index (CPI) release on Wednesday, following a December Producer Price Index (PPI) report that showed milder-than-expected inflation. The PPI rose by 0.2 percent in December, aligning with forecasts, and marking a slowdown from November’s 0.4 percent increase. Despite the tempered PPI figures, concerns persist about potential inflationary pressures in the forthcoming CPI data. The U.S. Federal Reserve has already projected just two rate cuts in 2025, with officials expressing concern over inflation remaining elevated.
Higher interest rates bode well for the U.S. dollar, and when the greenback appreciates against other currencies, it makes oil more expensive for buyers using other currencies. The US Dollar Index has consistently remained near a two-year peak after reaching it in December, creating pressure on oil prices. The recent surge in oil prices, with Brent crude reaching $80 per barrel, adds another layer of complexity. While gasoline prices have not yet significantly impacted consumers, increases in diesel, jet fuel, and heating oil may contribute to inflationary pressures in the near term.
API reports smaller-than-expected decline in crude inventories
The American Petroleum Institute (API) report showed that U.S. crude inventories fell by about 2.6 million barrels for the week ended Jan. 10, compared with a draw of 4 million barrels reported by the API for the previous week. Economists were expecting a decline of 3.5 million barrels. A smaller drawdown typically means that demand for crude oil may not be as high as anticipated, or that supply is more robust than expected. Gasoline inventories rose by approximately 5.4 million barrels, while distillate stockpiles, including diesel and heating oil, expanded by 4.9 million barrels. The official government report providing detailed inventory data is scheduled for release later in the day.
Oil prices saw a slight decline on Tuesday, retreating from a four-month peak driven by recent U.S. sanctions on Russian oil exports and anxieties regarding potential supply disruptions. As of 20:02 ET (01:02 GMT), Brent oil futures decreased by 0.3 percent to $80.77 per barrel, while crude oil WTI futures for March also fell by 0.3 percent, reaching $77.12 per barrel. This follows a rally in the previous two sessions, culminating in a four-month high the day before. The surge was largely influenced by the Biden administration’s introduction of its most extensive sanctions package on Friday, aimed at undermining Russia’s oil and gas revenue streams.
Impact of U.S. sanctions on Russian oil
The latest U.S. Treasury measures specifically target significant Russian oil producers, including Gazprom Neft and Surgutneftegas, along with 183 vessels involved in the transportation of Russian oil. These developments are anticipated to substantially disrupt Russian oil exports, pushing major importers like China and India to explore alternative suppliers in regions such as the Middle East, Africa, and the Americas. This transition raises concerns about tightening supply and the likelihood of increased demand from other sources. Analysts speculate that Russia may need to price its crude below $60 per barrel to maintain competitiveness, impacting overall market dynamics. Bernstein analysts noted, “New sanctions could push the price of Brent up to $90 per barrel for prompt delivery,” highlighting the potential volatility in the oil market.
Strong dollar’s influence on oil prices
On Tuesday, the U.S. dollar remained robust, with the US Dollar Index reaching its highest level in over two years. A stronger dollar can make oil more expensive for buyers using weaker currencies, often leading to reduced demand in non-dollar-denominated economies. This dynamic can exert downward pressure on global oil prices. While commodities like oil can attract speculative investment during periods of dollar weakness, a strong dollar may cause traders to shift towards safer assets, such as U.S. Treasury bonds, consequently lowering speculative demand for crude oil.
Oil prices had surged on Monday, continuing the upward momentum from last week as markets reacted to the anticipated supply disruptions following stringent U.S. sanctions on Russian oil exports. As of 20:35 ET (01:35 GMT), Brent oil futures rose by 1.8 percent, reaching $81.22 per barrel, while WTI futures for March increased by 1.7 percent to $77.06 per barrel. On Friday, prices had already jumped nearly 3 percent, marking their highest levels in three months.
