DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange reversed early gains to settle Monday's session lower, sending the international crude benchmark below $83 bbl as investors repriced the risk of broader escalation of hostilities in the Middle East following mixed messages from the Biden administration on a potential military response to a deadly drone attack on a U.S. outpost in Jordan.

Preliminary evidence suggests the drone strike that killed three U.S. servicemembers on Sunday was launched from Iraq by an umbrella group of Iran-backed militia. Public information about the so-called "Islamic Resistance of Iraq" is limited and it's not clear whether the group acted unilaterally or has taken direct orders from Tehran or any other government in the region. Biden administration has since vowed to retaliate against the strike but seemed to rule out a direct hit on targets in Iran or its proxies in the region.

"I do not have any force posture changes to announce today. We are not looking for a war with Iran. We do not seek to escalate -- but we will absolutely do what is required to protect ourselves to continue that mission and to respond appropriately to these attacks," John Kirby, Coordinator for Strategic Communications for the National Security Council, said in an interview with CBS.

Iran's Foreign Minister Nasser Kanaani denied Tehran's involvement in the attack, saying "the regional resistance groups do not take orders from Iran," according to state news agency IRNA.

Iran has either backed or sponsored over a dozen militia groups operating throughout the Middle East, including in Iraq, Syria, Lebanon, and Yemen.

For oil markets, a direct attack on a Russian oil tanker passing through the Gulf of Aden this weekend could have a more meaningful impact as it casts a shadow on safe passage for some 1.7 million bbl of Russian crude oil flowing through the Red Sea each day. So far, Russian oil flows have been unaffected by the ongoing conflict but that can change any moment as violence escalates.

Adding price pressure for West Texas Intermediate, the U.S. dollar strengthened 0.18% against a basket of foreign currencies to finish the session at 103.421, as investors position ahead of the Federal Reserve's first policy meeting of the year, scheduled for Tuesday-Wednesday (1/30-31). The consensus is for the Federal Open Market Committee to leave the federal funds rate currently in a 5.25%-5.5% target range unchanged. Traders and analysts will focus on the statement by central bank officials when announcing their decision on the federal funds rate Wednesday afternoon and any messaging about a potential rate cut in March from Fed Chairman Jerome Powell during a news conference following the rate announcement.

As of Monday afternoon, markets are nearly evenly split as to whether the central bank will lower the federal funds rate at their second 2024 FOMC meeting on March 19-20. On the one hand, inflation has been steadily moving in the right direction towards the Fed's 2% goalpost. Personal Consumption Expenditures index -- the preferred inflation gauge for the Fed, held at 2.6% in December, with core PCE falling below 3% for the first time since before the pandemic. According to FOMC's latest economic projections, the PCE index should average 2.4% in 2024 for the central bank to cut interest rates three times this year. From this standpoint, progress on inflation has fallen in line with, if not surpassing, the central bank's threshold.

On the other hand, consumer spending and national gross domestic product are still running too hot to ensure inflation could not again reignite in coming months. December's employment report showed U.S. labor market added 216,000 jobs at the end of 2023, and the jobless rate held steady at 3.7%. The economy is running above long-run potential, with the fourth quarter of 2023 having beaten estimates with a 3.3% growth pace.

At settlement, the international crude benchmark Brent for March delivery fell $1.15 to $82.40 bbl after climbing to $84.80 bbl 12-week high on the spot continuous chart in overnight trading. West Texas Intermediate March futures declined $1.23 to $76.78 bbl, reversing from a $79.29 eight-week spot high. NYMEX February ULSD futures dropped back $0.0095 to $2.8339 gallon, also reversing lower from an eight-week spot high of $2.8923 gallon. NYMEX February RBOB futures slid $0.0656 to $2.2285 gallon after trading at a $2.3170 14-week high on the spot continuous chart overnight.

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