By Barani Krishnan

Investing.com — Oil bulls are discovering that the Russia-OPEC driven crude rally isn’t immune after all to talk of a U.S. recession.

Since the Feb. 24 invasion of Ukraine, even in the weeks leading up to that, longs in crude have behaved as though supply disruptions are the only thing that matters to energy prices — not demand. 

This presumption has made it difficult for them to discuss the impact of the most severe inflation on America’s oil demand in over 40 years. China’s debatable actions in clamping down on new Covid breakouts in the world’s largest oil importing country had also fueled skepticism toward any selloff in oil.

As talk about demand destruction gained momentum, the oil bulls continued to dig their heels as this week’s gasoline and diesel retailing records at nearly $4.50 per gallons respectively. After a two-day slide of almost 10%, crude still managed to pull back half of those losses in just one session — Wednesday.

But the laser-focus of macro investors at the same time on the Fed’s tightening actions and whether that could ultimately do the economy in returned to haunt the oil market on Thursday.

After the sessions began in negative territory and ended with the second half being higher, crude benchmarks settled their day unchanged. More important was perhaps the sinking feeling in the stomach that crude longs simply could not ignore the adverse effects of inflation-recession talk.

“Oil prices remain a volatile trade as the crude demand outlook grows more uncertain,” said Ed Moya, analyst at online trading platform OANDA. “Inflation remains uncomfortably high and has accelerated global growth concerns. The risk-off tone on Wall Street is leading to a much stronger U.S. dollar which is weighing on oil prices.” 

New York-traded WTI (the benchmark U.S. crude oil) settled at $106.13, up 0.4% after dropping as high as $3 earlier in session.

After rallying more than 1 earlier, crude oil, which is the London-traded benchmark global for oil, dropped 6 cents to $107.45/barrel. 

While many energy traders remain fixated over the EU’s potential ban on Russian crude, fear of disruptions from that seems to be losing momentum, Moya said. 

According to the International Energy Agency, soaring prices for fuel and slowing growth of the economy are likely to severely limit the recovery process through the remaining year and well into 2023. 

“In this market environment, oil will struggle if China moves forward with city-wide lockdowns,” Moya said, adding that longs in crude will have to hope that summer U.S. road trips and flights and cruises hold up the demand picture.

Economists fear that the U.S. economy, finally on the path to resilience after the damage wrought by the two-year long coronavirus pandemic, could head for negative growth again from the Fed’s .

According to the Labor Department, PPI (or Price Per Inflation) measures how much retailers are paying for wholesale goods in April after an 11.2% increase in March.

A day earlier, the department reported that the Consumer Price Index, or CPI, in the year to April — versus 8.5% rise in the 12 months to March — as fuel and food prices stayed near record highs.

Before PPI and CPI readings were made, the Personal Consumption Expenditure Index or PCE (which is closely tracked by the Fed) rose by 5.8% for the year ended December and 6.6% for the 12-months ending March. 

The Fed, whose own tolerance for inflation is a mere 2% per year, has been alarmed by these numbers and is determined to bring the PPI, PCE and CPI  readings back to benign levels.

The central bank officials are discussing whether a 75-basis-point interest rate increase could be possible in June. It would follow the 50-bps, 25-bps, and 25-bps increases that they received at their May, March, and December meetings. The largest rate increase since 1994 would be a 75-bps rise. 

Fed Chair Jerome Powell has also indicated that a total of seven rate hikes — the maximum allowable under the central bank’s calendar of meetings this year — were on slot for 2022, and more could follow in 2023, until a return to the annual 2% inflation rate is achieved.