Oil falls as sticky US inflation heightens demand concerns

Army soldier miniatures and stock graph are seen in this illustration taken October 9, 2023. REUTERS/Dado Ruvic/Illustration/file photo

By Katya Golubkova and Emily Chow

SINGAPORE (Reuters) -Oil prices fell as investor attention returned to the demand outlook after reports of higher producer prices in the U.S., the world’s biggest oil user, stoked worries that sticky inflation and higher interest rates would limit fuel consumption growth.

Brent crude futures were down 61 cents, or 0.7%, at $82.86 a barrel at 0440 GMT. The March contract for U.S. West Texas Intermediate crude, which expires on Tuesday, was 41 cents, or 0.5%, lower at $78.78.

The WTI April contract was down 0.8%, or 60 cents, at $77.86.

Both Brent and WTI contracts had settled higher on Friday, as geopolitical tensions in the Middle East offset slowing demand forecasts from the International Energy Agency.

“WTI and Brent eased on Monday morning as investors re-adjust to demand-side fears after a significant jump in U.S. producer price index numbers,” said Phillip Nova analyst Priyanka Sachdeva in a research note.

U.S. producer prices increased more than expected in January amid strong gains in the costs of services, which could amplify inflation worries.

Markets are also yet to see the direction of demand from China after that country returns from a week-long Lunar New Year holiday, while Presidents’ Day in the United States is set to keep trade relatively muted.

Moreover, Federal Reserve policymakers on Friday signalled “patience” toward interest rate cuts. Higher rates keep up the cost of buying oil, providing for a bearish market trend.

Over the weekend, tension in the Middle East continued as Israeli raids put the Gaza Strip’s second-largest hospital out of service, and Yemen’s Iran-aligned Houthi fighters claimed responsibility for an attack on an India-bound oil tanker.

The Organization of the Petroleum Exporting Countries (OPEC) would be able to cover “most levels of disruption”, ANZ Research analysts said in a client note, as its spare capacity is at an eight-year high of 6.4 million barrels of oil per day.

“The market was also reminded of the uncertain outlook for demand, with the International Energy Agency warning that growth is expected to lose its steam in 2024,” ANZ said. The agency forecasts a market surplus during the year.

The United Nations Security Council is likely to vote on Tuesday on an Algerian push for the 15-member body to demand an immediate humanitarian ceasefire in the Israel-Hamas conflict, diplomats said, with the United States signalling it would veto.

In Europe, Russia on Sunday said it had full control of the Ukrainian town of Avdiivka in its biggest gain in nine months, days ahead of the two-year anniversary of its invasion.

It was not immediately clear whether the death of Alexei Navalny, President Vladimir Putin’s most high-profile opponent, in a Russian Arctic penal colony on Friday would trigger new sanctions on Moscow, the world’s second-biggest oil exporter.

(Reporting by Katya Golubkova in Tokyo and Emily Chow in Singapore; Editing by Christopher Cushing and Shri Navaratnam)