Oil Snaps Back up on Macro Risk Trade; 'Peak-Inflation' Talk Dents Dollar

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By Barani Krishnan

AiVIF.com -- Crude prices recovered a third of what they lost in the first three days of the week after a major risk-on trade across markets on Thursday boosted oil as well.

The rally came as the dollar tumbled for the first time in a week on talk that U.S. inflation readings might have peaked, despite the Federal Reserve looking ready to pile more rate hikes on the economy.

“It’s the big macro trade, rather than what’s improved with oil per se,” said John Kilduff, partner at New York energy hedge fund Again Capital, referring to the near 1,000-point on Wall Street’s Dow index at the highs of the day.

New York-traded West Texas Intermediate crude settled up $1.84, or 2.1%, at $89.11 per barrel, after falling nearly 7% in the Monday-Wednesday stretch. In the prior week, the U.S. crude benchmark rose 17%, in a powerful start to October, after a 12.5% drop in September and 24% loss for the third quarter.

London-traded Brent oil settled up $2.12, or 2.3%, at $94.57 per barrel, after the 7% drop in the first three days of the week. Brent rose 11% in the prior week, making up all of its September loss and recovering partially from its 22% drop in the third quarter.

The Dollar Index, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, fell for the first time in seven days, after hitting a two-week high of 113.835. Technical charts, however, suggest the index could still hit 120 in the coming weeks, putting renewed pressure on crude and other dollar-denominated commodities.

U.S. bond yields, benchmarked to the 10-year Treasury note, remained up as well on Thursday, favoring an eventual dollar rebound.

The dollar tanked on Thursday despite the latest inflation data from the Labor Department suggesting the Fed was still far behind in its fight against price pressures.

The U.S. Consumer Price Index rose by 0.6% in September, growing double to economists’ estimates and four times higher than in August, Labor Department data showed.

The Fed has struggled to contain inflation for more than a year now, with the annual CPI rate remaining not too far from a 40-year peak of 9.1% in June. The central bank raised interest rates by 300 basis points since March to curb runaway price pressures and is likely to add another 125 basis points before the year-end. Economists expect further hikes in 2023, making any talk of “peak-inflation” irrelevant for now.

“Policymakers have made clear that it will take more than just one number to sway them but investors have never been ones to wait that long,” OANDA analyst Craig Erlam said, questioning any premature risk-on rally in markets expecting a Fed pullback in rates.

Crude prices actually started Thursday’s session lower, with both WTI and Brent down almost 2% in early New York hours, ahead of weekly inventory data from the Energy Information Administration.

The EIA later surprised the market by announcing a humongous crude build of nearly 10 million barrels for last week. But traders took it positively after noting that there were huge outflows as well from the U.S. oil reserve, along with cutbacks in U.S. crude exports that more than accounted for the inventory build.