Oil Declines, But Holds Above $90 on US CPI

Oil prices fell slightly on Thursday, but retained most of their recent gains as lower-than-expected US inflation data raised expectations for a smaller rate hike by the Federal Reserve.

As of 2011 ET (0011 GMT), US benchmark WTI futures were down 0.6% to $91.37 a barrel, while UK-traded Brent crude futures fell 0.1% to $96.91 a barrel. US futures rose 1.1% on Wednesday, while the British benchmark gained 0.5%. Prices rose from weekly lows on Wednesday after the US consumer price index showed inflationary pressures eased in July - the result of a series of rate hikes by the Federal Reserve to contain excessive prices. The dollar index edged lower as investors started to forecast a 50 basis point rate hike at the Fed's September meeting. Initial expectations were for a 75 basis point hike. The slower tightening of monetary policy and the decline in inflation are expected to take some pressure off US economic activity, leading to a rebound in demand for crude oil. Moreover, concerns over supply tightness in Europe stemming from Ukraine's shutdown of the Druzhba oil pipeline from Russia had also supported prices. However, exports to Europe are expected to resume soon. In the near term, however, oil is likely facing a supply glut due to declining demand in major economies. US government data released on Wednesday confirmed that crude oil inventories rose more than expected last week, pointing to sluggish demand. Inventories rose by 5.458 million barrels in the week to August 5, well above analyst forecasts of 73,000 barrels. Crude oil stocks had unexpectedly increased by about five million barrels in the previous week. Weak factory activity in China, as evidenced by weak PMI data and a decline in producer price inflation, indicate that crude oil demand in the second largest economy will remain sluggish. US factory price inflation data, due at 0830 ET on Thursday, will show whether inflationary pressures on US industries are easing.