Oil prices settle lower on hot US inflation data; OPEC maintains forecasts

Investing.com - Oil prices settled lower Tuesday, as signs that inflation remains stubbornly high put a damper on rate cut expectations just as focus shifts to fresh U.S. supply data.

AT 14:30 ET (18:30 GMT), Brent oil futures fell 1.1% to $82.42 a barrel, while West Texas Intermediate crude futures fell 1.4% to $78.02 a barrel.

PPI surprises on the upside to keep lid on rate cut bets

U.S. producer prices grew by a faster-than-anticipated rate of 0.5% on a monthly basis in April, due mainly to elevated costs for services and goods, in a sign of lingering inflationary pressures early in the second quarter.

It was a quicker pace than an increase of 0.3% economists had predicted and up from a downwardly revised month-on-month contraction of 0.1% in March.

The PPI data is "still above the threshold we see as convincing evidence that inflation is moving in the right direction," Morgan Stanley said in a note.

In the twelve months through April, the producer price index for final demand moved up by 2.2% as expected -- the largest uptick since a jump of 2.3% in April 2023. An updated mark for the previous month was also revised lower to 1.8%.

China outlines fiscal stimulus plans

There had been a positive tone on Monday after China’s finance ministry said that it plans to start raising 1 trillion yuan ($138 billion) through a long-awaited bond issuance this week.

The issuance is aimed chiefly to stimulate key aspects of China’s sluggish economy, and will entail the issuance of special government bonds with tenors of 20 to 50 years.

Chinese ministers said the bonds will be used to shore up sluggish economic growth, and will be deployed towards key sectors including infrastructure.

While the issuance was largely telegraphed by Chinese authorities, its confirmation still factored into some optimism over improving economic conditions in the world’s biggest oil importer.

The bond issuance came after mixed inflation readings over the weekend raised some concerns over a sustained economic recovery in China. While consumer inflation rose, producer inflation shrank for a 19th consecutive month.

Canadian wildfires could cause potential supply disruptions

Additionally, major wildfires spread across Western Canada, presenting the potential for disruptions in Canadian oil and gas supplies, especially as they neared a key oil hub.

Residents of Fort McMurray, Alberta, were put on alert as the province saw two “extreme” wildfires. The city is the closest settlement to Canada’s biggest oil-sands operations, and had in 2016 suffered severe damage from wildfires.

Still, rain in the region helped decrease the immediate threat from the fires, although residents were still kept on alert.

Any worsening in the wildfires present the prospect of supply disruptions in Canada’s massive oil and gas industry, which is a key part of North American crude markets.

Canada’s worst-ever wildfire season, seen in 2023, knocked out as much as 300,000 barrels of production a day. In 2016, damage to Fort McMurray had put about 1 million barrels per day out of commission.

OPEC keeps forecast unchanged ahead of meeting

In its monthly report, OPEC maintained its forecast for world oil demand to rise by 225 million barrels per day in 2024 and 1.85M bpd in 2025, though signal firmer demand may in the offing as the group sad it expected stronger global economic growth this year.

The unchanged forecast comes weeks ahead of the next meeting between OPEC and its allies, or OPEC+.

Iraq's oil minister, Hayyan Abdul Ghani, is reported to have said over the weekend that his country would honour voluntary output cuts made by OPEC+, which includes the Organization of the Petroleum Exporting Countries, Russia and other non-OPEC producers, at its upcoming meeting on June 1.

That reversed course from his Saturday comments that Iraq had made enough voluntary reductions and would not agree to any new output cuts.

"The lack of price direction more recently is no surprise given the uncertainty over what OPEC+ members may do with their additional voluntary supply cuts," analysts at ING said, in a note.

(Peter Nurse, Ambar Warrick contributed to this article.)

This article first appeared in Investing.com