Crude oil prices tumble after disappointing U.S. inflation data

Business a.m

Oil prices plunged on Tuesday, driven by concerns that a potential pivot in the Federal Reserve’s interest rate policy may be less imminent than previously thought. The inflation data, which came in below expectations, raised the possibility that the Fed may not be ready to reverse course on rate hikes in the near future.

These worries were compounded by ongoing concerns about excess supply and sluggish demand, which were only partly offset by the effects of a recent attack on a commercial chemical tanker by Iran-backed Houthi rebels. 

In response to the aforementioned concerns, Brent oil futures for the month of February dropped by 2.9 per cent to a price of $73.81 per barrel. The contract had temporarily touched its lowest point since June earlier in the day, before clawing back some of its losses. Similarly, West Texas Intermediate crude futures fell by 3.0 per cent to $69.40 per barrel.

According to data released by the U.S. Bureau of Labour Statistics, annual consumer price inflation decreased to 3.1 per cent in November, from 3.2 per cent in October. Month-on-month inflation also rose by 0.1 per cent, below the 0.0 per cent level that economists had projected. 

The “core” inflation measure, which excludes food and energy prices that tend to be more volatile, rose by 4.0 per cent on an annual basis, the same as in October. On a month-on-month basis, core inflation increased by 0.3 per cent, in line with expectations and slightly faster than the 0.2 per cent growth seen in the previous month. These figures indicated that inflationary pressures, while still elevated, were starting to ease.

The implications of the latest inflation data for the global economy are potentially negative, particularly for countries that are highly dependent on the U.S. as a key export market. This is because if the Fed does not change course on its monetary policy, it could lead to a significant slowdown in the U.S. economy, which could in turn impact demand for imported goods from other countries. Oil-producing nations are especially at risk, as a slowdown in the U.S. economy could have a negative impact on oil prices.

Adding to the bearish demand picture, data released over the weekend showed that China, the world’s largest oil importer, fell further into deflation in November. This added to concerns about the outlook for the Chinese economy, which is already facing challenges including a real estate crisis.

In summary, the global oil market is facing significant challenges in the near term, with slowing demand, volatile prices and geopolitical uncertainties all weighing on the outlook. The major drivers of these challenges include restrictive monetary conditions and underwhelming production cuts from OPEC+. According to analysts, these factors are likely to continue to affect the market in the coming months, with the potential for further weakness in oil prices.