DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange fell again in early morning trade Friday, pressuring the international benchmark below $75 barrel (bbl) in reaction to weaker-than-expected manufacturing data out of the European Union, showing business activity across the industrial sector eased to the lowest level in four months, driven by the loss of new orders and consumer demand.

Manufacturing output in the Eurozone stagnated for the second straight month in March, with factory output falling into contraction territory to 49.9 from 50.1 in late February. The reading of 50 separates growth from contraction. Services sectors, on the other hand, powered higher to a 10-month high 55.6, lifting overall economic activity across the Eurozone.

"Growth is very unbalanced, driven almost entirely by the service sector with manufacturing largely stalled and struggling to sustain production in the face of falling demand." said Chief Business Economist at S&P Global Market Intelligence Chris Williamson. Looking deeper into the data, manufacturing activity in Germany -- the bloc's largest economy -- eroded to the lowest level since May 2020 when the economy was largely shut by the COVID lockdown. Turning to prices, March's flash data for Germany and France showed the rate of inflation in goods and services still running well above its historical series average but eased further from the highs in 2022 to a near two-year low.

This could be good news for the European Central Bank that has been trying to slow the rate of inflation across the euro area for over a year now. The ECB raised its key benchmark lending rate by another 50 basis points on March 16 in an attempt to backstop further price increases despite the turmoil in the banking sector.

European equity markets continue to decline Friday, with bank shares falling more than 4%. Deutsche Bank shares are down more than 10% as credit-default swaps rise amid broader fears about the banking sector's health.

Domestically, the Federal Open Market Committee lifted the overnight bank borrowing rate by 0.25 percentage points this week to a 4.75% to 5% target range, matching market expectations, while signaling the central bank might raise rates one more time should inflation prove sticky.

"We really don't see enough progress on core services inflation which excludes housing. The strength of recent readings indicates inflation pressures continue to run high," said Fed Chairman Jerome Powell in his news conference following the rate decision.

The message is underpinned by data released on March 14 showing prices paid by consumers had once again risen faster than expected last month. The Fed's policy committee in its March economic projections said consumer inflation will average 3.3% this year -- higher than the 3.2% level of inflation expected in December, and well above the Fed's 2% target.

On the economy, FOMC revised its 2023 gross domestic product forecast down 0.1% to 0.4% on Wednesday, and projected the national unemployment rate would climb to 4.5% -- almost a full percentage point higher than the current 3.6% rate.

"Reducing inflation is likely to require a period of below-trend growth for some time along with softer labor conditions," reiterated Powell, adding recent developments in the banking sector "could tighten credit conditions to further weigh on the economy."

Softer growth expectations are yet to be reflected in labor market conditions. Unemployment claims fell again last week to 191,000, remaining below the pre-pandemic average of 200,000 for every week this year except for three. This could be supportive for gasoline demand in the U.S. that typically tracks the labor market.

Wednesday's inventory report from the U.S. Energy Information Administration showed that demand for gasoline last week climbed to the second highest rate this year at 8.96 million barrels per day (bpd), up 366,000 bpd from the previous week. On a four-week average basis, gasoline consumption averaged 8.807 million bpd, near the comparable period in 2022 when the four-week consumption rate was 8.821 million bpd. So far in 2023, gasoline demand trails the year-ago pace by 114,000 bpd or 1.3% at 8.486 million bpd.

Near 7:30 a.m. EDT, NYMEX West Texas Intermediate futures fell $2.73 to $67.19 bbl, and the international benchmark Brent contract declined to $73.08 bbl, down $2.88 bbl. NYMEX RBOB fell $0.0700 to $2.5432 gallon and ULSD futures for April delivery retreated $0.0356 to $2.6491 gallon.

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