DTN Oil

WASHINGTON (DTN) -- Reversing midmorning losses, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Monday's session with solid gains as investors balanced the impact of a stronger U.S. dollar against an improved outlook for the domestic economy that is underpinned by a robust labor market, income gains for the American consumer, and moderating inflation.

Monday's session saw another release of bullish macroeconomic data in the United States, suggesting economic activity likely accelerated at the start of 2024. The Services Index published by the Institute of Supply Management rose 2.9% to 53.4% in January, driven mostly by faster growth for new orders, expanding employment and imports. All ten of the large service industries in the United States reported growth.

"Economic indicators generally look good; however, there is still some uncertainty. It would be amiss not to mention that we are still seeing the effect of people returning to offices, which impacts demand. Though demand has continually increased, it is not at pre-pandemic levels," said a representative from the transportation equipment industry.

During the post-pandemic years, there has been a growing disconnect between the strength of the U.S. economy and fuel demand that historically had a close correlation. For instance, while the labor market outperforms all expectations with neck-breaking job creation, gasoline consumption continues to lag far behind its pre-pandemic trend. U.S. gasoline consumption averaged 8.15 million bpd in the first four weeks of 2024, down from 8.9 million bpd in the comparable four weeks seen in 2019. For all of 2023, U.S. gasoline consumption averaged 4% below the 2019 consumption rate.

In financial markets, investors continue to push back expectations for the first interest rate cut by the Federal Reserve into the second quarter. Fed Fund futures indicate only a 15% probability for the Federal Open Market Committee to reduce the federal funds rate in March and a slightly more than 50% chance for a May rate cut. As of Monday afternoon, investors expect the key overnight bank borrowing rate to be cut by 100 basis points this year, down from 150 basis points forecasted only a week ago.

The aggressive repricing of Fed Fund futures follows a much stronger-than-expected employment report for January showing the labor market added 353,000 new jobs while the unemployment rate held near a 50-year low 3.7% for the third consecutive month. What's more, hourly earnings in January rose 19 cents or 0.6% to $34.55, lifting annualized wage growth to 4.5% at the start of 2024. Economists largely expected hourly earnings to ease to 0.3% at the start of the year.

When the Federal Reserve began to raise interest rates in the Spring of 2022, the economy added more than 5 million jobs, with nominal wages steadily rising to exceed the rate of inflation.

"The strength of the U.S. economy reflects renewed fiscal easing, consumers' willingness to continue drawing on excess savings, strong household balance sheet fundamentals and a tight labor market," said Olu Sonola, head of Fitch U.S. economic research.

Fitch Ratings estimates American households' disposable income increased 6.9% year-on-year in 2023, helped by 5.1% increase in consumer net worth.

During a Sunday CNBC "60 Minutes" interview with Fed Chairman Jerome Powell, Powell said "With the economy strong like that, we can approach the question of when to reduce interest rates carefully. We want to see more evidence that the inflation is moving sustainably to its 2% target."

Powell added, "It's not likely that this Committee will reach the required level of confidence for the March meeting, which is just in seven weeks."

Monday's sharp gains in the U.S. service sector combined with Friday's bullish employment report and comments from Powell, the U.S. dollar kicked off the new trading week with a solid rally, climbing to the highest settlement since mid-November at 104.319.

The stronger dollar weighed on the front-month West Texas Intermediate contract, which has an inverse relationship with the currency. At settlement, WTI futures for March delivery advanced $0.50 to $72.78 bbl, while international crude benchmark Brent April futures moved $0.66 higher to $77.99 bbl. NYMEX March RBOB futures added $0.0617 to $2.2092 gallon, while the March ULSD contract jumped $0.0648 to $2.7248 gallon.

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