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 in forty years, and the implications that this may have on oil demand. 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.

Oil bulls also reacted to talk of destruction as gasoline prices reached record levels of almost $4.50 per gallon, and diesel was well over $6 at U.S. pump pumps. 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 session higher, crude benchmarks ended the 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’s WTI was the benchmark crude oil price. It fell as low as $3 in the previous session and settled up 42c or 0.4% at $106.13.

Crude, the London-traded benchmark oil price, fell 6 cents or 0.01% to $107.45 per barrel, after rising by more than $1. 

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. 

The International Energy Agency warned Thursday that rising pump prices and slower economic growth will significantly limit demand recovery throughout the rest of this year and 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 .

After an increase of 11.2% in the twelve months to March and a 11% rise in the year-to-April, the Labor Department reported Thursday.

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.

The Personal Consumption Expenditure Index (or PCE), which is closely monitored by the Fed, grew by 5.8% and 6.6% respectively in the twelve months to 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. A 75-bps rate hike would mark the biggest upward adjustment since 1994. 

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.