Oil settled over $80 a barrel on Tuesday and recorded its biggest daily gains in over a month, as investors bought up risk assets after U.S. data pointed to slowing inflation.
The market was also buoyed by concerns about supply disruptions, including the ongoing shutdown of the Canada-to-United States Keystone crude pipeline following a massive leak last week.
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Brent crude futures settled at $80.68 per barrel, up $2.69, or 3.5%. U.S. West Texas Intermediate (WTI) crude futures settled at $75.39 per barrel, up by $2.22, or 3%. Both contracts recorded their biggest daily gains since Nov. 4.
The dollar index plunged on Tuesday after data showed that underlying U.S. consumer price inflation rose less than expected last month, reinforcing expectations that the Federal Reserve will slow the pace of its interest rate increases on Wednesday.
A weaker dollar makes oil cheaper for holders of other currencies, which can boost demand.
"Nobody really saw that number coming in below expectations - a possible demand-positive event that put a bid in the market," Mizuho analyst Robert Yawger said.
The focus will now shift to how the U.S. Federal Reserve responds to the CPI report, Yawger added. A pause in interest rate hikes could push prices higher.
However, traders said oil supply concerns have been around for a few days now, suggesting Tuesday's rally may be down to broader 'risk-on' sentiment after the inflation data.
"This is just a dollar-based broad rally," said Eli Tesfaye, senior market strategist at RJO Futures. "Given the sustained drop in the market, any positive news will lift oil, but it remains to be seen if these rallies will hold."
Tuesday's rally could also be due to traders closing out short positions - speculative bets that the price of a commodity will decline - after both benchmarks fell more than 10% last week.
"After being on the receiving end of an absolute drubbing last week, some buying interest and bargain hunting is coming back into the crude complex," said Matt Smith, lead oil analyst at Kpler.
The market had been sinking of late on pessimistic outlooks for demand. The Organization of the Petroleum Exporting Countries on Tuesday trimmed its first-quarter absolute oil demand forecast and said the global economic slowdown is becoming evident.
Chinese leaders reportedly delayed a key economic policy meeting due to surging COVID-19 infections, adding to concerns about demand recovery in the world's biggest crude importer.
TC Energy Corp's Keystone Pipeline, which ships 620,000 barrels per day (bpd) of Canadian crude to the U.S., remains shut after a spill last week, which could reduce overall U.S. inventories, particularly at the Cushing, Oklahoma, hub, the delivery point for U.S. futures contracts.
U.S. crude inventories were forecast to fall by 3.6 million barrels last week, according to a Reuters poll.
Industry data from the American Petroleum Institute is due, followed by government data on Wednesday.