Oil prices steady amid renewed inflation fears and stronger dollar

Consumer spending in the US recorded its highest increase since June 2022

An oil rig in the Gulf of Mexico. Oil prices were flat last week amid an increase in US crude stocks and fears of interest rate increases. AFP

Oil prices were steady on Monday after falling earlier on a stronger dollar and as signs of rising inflation in the US stoked concerns of further interest rate raises.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.17 per cent higher at $83.30 at 2.13pm UAE time.

West Texas Intermediate, the gauge that tracks US crude, was up 0.24 per cent at $76.50 a barrel.

A key measure of inflation in the US ticked higher in January, adding to expectations that the Federal Reserve will keep raising interest rates this year.

The personal consumption expenditures (PCE) price index, a measure of consumer spending in the world’s largest economy, rose 0.6 per cent last month, the largest increase since June 2022, the Commerce Department said on Friday.

On a year-on-year basis, the PCE increased to 5.4 per cent in January from 5.3 per cent in December.

Core PCE, which excludes food and energy, climbed 0.6 per cent, after a 0.4 per cent rise in the previous month.

Meanwhile, consumer spending surged to 1.8 per cent last month — the largest increase since March 2021.

“The turnaround in prices will push against the disinflation trend that the headline CPI [consumer price index] is showing and could prompt further re-evaluation in how high policy rates need to go in the US this year,” said Edward Bell, senior director of market economics at Emirates NBD.

Oil prices were flat last week as gains triggered by China’s recovery and supply fears were offset by rising US crude stocks and fears of more aggressive interest rate increases by central banks.

Minutes released by the Fed from its latest meeting showed that policymakers expect continuing interest rate increases to bring inflation back down to their long-term goal of 2 per cent.

Most officials agreed to reduce the pace of rate increases to 25 basis points but a few recommended an increase of 50 bps to bring the Fed Funds rate to a level they consider “sufficiently restrictive”.

“The risks that the Fed will have to send the economy into a recession are growing,” said Edward Moya, a senior market analyst at Oanda.

“It is getting ugly on Wall Street as risk aversion runs wild and that could keep oil prices heavy.”

Expectations of further interest rate raises have also strengthened the dollar.

The US Dollar Index — a measure of its value against a weighted basket of major currencies — has gained about 3 per cent over the past month. It was marginally up at 105.24 on Friday.

A stronger dollar makes dollar-denominated oil more expensive for holders of other currencies.

"Crude oil continues struggling. Oil bulls never really bought the Chinese reopening story, nor the sharp decline in Russian output," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

"But they might well play the rising recession odds that come along with the tighter central bank policies around the world."