DTN Oil

WASHINGTON (DTN) -- Weighed down by an overnight retreat in U.S. equities futures and a strengthening dollar index, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange began the new trading week deeply in the red as investors position ahead of U.S. Federal Reserve two-day policy meeting scheduled for Tuesday and Wednesday, with expectations for the central bank to start pulling back monetary stimulus amid surging inflation and an improving labor market.

Near 7:30 a.m. ET, NYMEX October West Texas Intermediate futures fell below $71 per barrel (bbl), down $1.36 or 2%, and Brent crude for November delivery declined $1.14 to trade near $74.20 bbl. NYMEX October ULSD futures tumbled 3.96 cents or 1.5% to $2.1695 gallon, and front-month RBOB futures shed 3.89 cents to $2.1678 gallon.

U.S. Dollar Index jumped 0.16% against a basket of foreign currencies to trade near a four-week high 93.445 on Monday, with September's slide in U.S. equity markets intensifying into a new trading week. After declining for four consecutive weeks, contracts linked to Dow Jones Industrials suggest a 500-point drop on Monday amid fear over a sharp slowdown in China's economy, rising inflation domestically and expectations that the U.S. Federal Reserve would take the first step this week to withdraw pandemic-era emergency stimulus. Federal Open Market Committee meeting will conclude at 2 p.m. ET Wednesday, and Chairman Jerome Powell is scheduled for a news conference 2:30 p.m. ET when he is expected to provide details on the timeline for tapering $120 billion a month in bond and mortgage-backed securities purchases. The details will be accompanied by a fresh set of projections for U.S. economic growth, unemployment and inflation, and expectations for when interest rates may begin to rise from Monday's near-zero levels.

In recent weeks, U.S. labor market showed continued signs of improvement, with first-time unemployed claims remaining near pandemic-era lows and the number of new COVID-19 infections slowly recede amid a pickup in vaccination rates. U.S. rerail sales for August surprised markets to the upside with a 0.7% month-on-month gain versus an expected 0.8% drop, signaling broader resilience of the American consumer.

The rise in consumer prices have also eased in the past two months, with closely watched core inflation, which excludes volatile food and energy, up a mere 0.1% month-on-month in August, easing from 0.3% increase in the prior month and well below 0.9% hike in June. For now, investors continue to think that inflation is transitory and linked to the reopening of the economy -- a narrative propelled by the Fed.

Further weighing on the oil complex, Baker Hughes reported on Friday the number of active oil rigs drilling in the United States increased 10 last week -- the largest rise in over a month, signaling an accelerated recovery in domestic oil production. At 411, the number of oil targeted rigs now stand at a 17-month high and is up 232 from the comparable week a year ago. Data also showed there were four active rigs in the U.S. Gulf of Mexico -- steady from the previous week while a year ago there were 14 in operation.

The Bureau of Safety and Environmental Enforcement reported 23.19% or 422,078 barrels per day (bpd) of current oil production in the offshore Gulf of Mexico remained offline on Friday, a marked improvement from 48.56% or 886,755 bpd reported shut-in on Monday. Operators in the region have been able to quickly restore pipeline service and power supplies after another hurricane, Nicholas, made landfall about 80 miles south of Houston last week as a category one hurricane. Unlike Ida however, Nicholas turned out to be more of a rain event, allowing producers in the region to resume efforts to repair significant damages brought by Ida's landfall on Aug. 28.

Liubov Georges can be reached at liubov.georges@dtn.com