DTN Oil

WASHINGTON(DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange powered higher in early trade Wednesday, with the U.S. crude benchmark trading on either side of $112 bbl as investors parse through a myriad of emerging supply risks in the aftermath of Russia's invasion of Ukraine on Feb. 24, including a "self-imposed" oil embargo on Russian crude cargos by Western companies, with supply chain disruptions deepening in key manufacturing hubs in Asia and Eastern Europe that stand to further exacerbate inflation.

Chaos in global supply chains is unlikely to ease anytime soon, according to Federal Reserve Chair Pro Tempore Jerome Powell, who gave a pivotal speech this week in front of the National Association of Business Economics, citing COVID-related shutdowns in China and the blockade of Ukraine's Back Sea ports of Mariupol and Odessa. With Moscow's war raging in Ukraine, exporters and logistics firms are now forced to find new transportation routes that would avoid combat zones and Russia's massive landmass. Europe's largest freight companies are reportedly looking at a combination of sea-air solutions that could help manufacturers prevent production disruptions but add to transportation costs.

The new dynamics are clearly inflationary for the export/import oriented economies of Western Europe and the United States, where consumer price index jumped to a four decade high 5.9% on annualized basis in February and a record-high 7.9%, respectively.

On Monday, Powell said the central bank is now prepared to move more aggressively on interest rates to get a handle on inflation, while cautious of de-anchoring the long-term inflation expectations.

"The longer inflation stays elevated -- the higher the risks that it will become embedded in the economy," added Powell.

The most recent survey from the University of Michigan still shows that American consumers expect inflation to ease from 5% by the end of the current year to 3% in 2025. Should those expectations change in coming months, it could signal the emergence of inflationary phycology, a phenomenon that kept inflation elevated in the U.S. throughout the 1970s and early 1980s.

Powell was uncharacteristically forceful in his tone, indicating the possibility of one or more 50 basis point rate hikes at coming meetings, and that the Fed would aggressively work to reduce inflation even if that meant tightening monetary policy to the point it slows economic growth.

Following Monday's speech, Goldman Sachs in a note to clients said it expects the Fed to lift the federal funds rate by 50 basis points at both its May and June Federal Open Market Committee meetings. FOMC meets six more times in 2022, with the Fed's dot-plot released March 16 showing a rate hike at each of those meetings. Furthermore, a number of Fed officials that are considered both doves and hawks backed Powell's comments, signaling a united front by the central bank to fight inflation.

Slowing economic growth is most likely impacting fuel demand in the United States, with DTN's Refined Fuels Demand data showing gasoline demand for the week-ending March 18 decreasing 6.2% and diesel demand down 4.5% from the prior week. Although the decline in fuel demand appeared weather related, and more data is need to confirm if a trend is forming, the recent widespread weakness in diesel and gasoline demand may be early signs of demand destruction. That said, it's worth noting that even amid the recent week-on-week declines in demand, diesel demand is still 8.2% above 2019 levels for the seasonal period, and gasoline demand 2.3% above 2019 levels for the week.

Investors will be paying close attention to the demand response in the U.S. and the European Union for potential indication of a longer-term effects on consumption patterns.

U.S. Energy Information Administration will release its inventory report at 10:30 AM ET. Late Tuesday, American Petroleum Institute data showed commercial crude oil supplies tumbled 4.28 million bbl last week, with calls ranging from a drop of 3.4 million bbl to a weekly gain of 2.5 million bbl. Inventories at the NYMEX West Texas Intermediate delivery point in Cushing, Oklahoma, added 646,000 bbl. Gasoline stockpiles fell 626,000 bbl in the week profiled, below estimates for a 1.5 million bbl draw. API data show distillate inventories decreased 826,000 bbl versus calls for a decline of 800,000 bbl.

Near 7:30 AM ET, NYMEX May WTI futures advanced $2.42 bbl to trade near $111.80 bbl, with ICE May Brent futures gaining $2.90 to $118.40 bbl. NYMEX April RBOB futures registered a 3.97 cents gain to $3.3704 gallon, and April ULSD futures edged 0.90 cents higher to trade near $3.8733 gallon.

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