Oil Futures Advance on Strong Demand

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and Brent crude on the Intercontinental Exchange registered sharp gains Wednesday, bolstered by federal data showing strong domestic demand for diesel and gasoline, but backed off intraday highs in afternoon trade following the Federal Reserve's announcement that they raised the federal funds rate.

At the conclusion of the Federal Open Market Committee's two-day meeting, the central bank said officials decided to lift the federal funds rate 25 basis points to a 2.25%-to-2.5% range, which was widely expected. There were calls for the Fed to skip a rate hike at this week's meeting, including from U.S. President Donald Trump, over concern higher borrowing costs would slow U.S. economic growth, with those worries amplified by heavy selling in equities in the fourth quarter. The Dow Jones Industrial Average reversed lower following the Fed decision, down 350 points late afternoon.

The Fed signaled two more rate hikes next year, down from expectations that the central bank was on course to hike the federal funds rate as many as four times in 2019.

The overnight interest rate for banks is the baseline for setting borrowing rates for mortgages, auto loans and credit cards. Rates are lifted when the economy is healthy, although higher interest rates can reduce demand for home mortgages and other big ticket items that are typically paid for over time.

The FOMC statement painted a rosy picture for the U.S. economy, contrasting with soothsayers suggesting the United States would be pulled into a downdraft by slowing world economic growth. Late last week, macroeconomic data showed economic slowdowns in China and Europe, with sluggish economic performance linked primarily to the U.S.-China trade dispute. The U.S. economy is far less dependent on exports than China and Germany, Europe's main economic engine, with a recent Wall Street Journal article noting U.S. exports account for 12% of gross domestic product compared with a global average of 29%.

In their news release, FOMC said the latest data "indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year."

Those comments fit nicely with data released midmorning from the Energy Information Administration showing implied demand for distillate fuels surged 418,000 barrels per day (bpd) during the second week of December to 4.886 million bpd—the highest weekly demand rate since Jan. 31, 2003. Implied distillate demand during the four weeks ended Dec. 14 is up a sharp 259,000 bpd, or 6.5%, against the comparable year-ago period while up 52,000 bpd, or 1.3%, at 4.093 million bpd for the first 11-1/2 months of 2018.

Distillate fuels include diesel and heating oil, with diesel primarily used in industrial and commercial sectors in the United States, comporting with the Fed's view of a strong domestic economy.

The U.S. dollar trimmed losses in index trading following the central bank announcement, holding near a one-month low after rallying prior Friday to a nearly 18-month high.

NYMEX January West Texas Intermediate futures expired up $0.96 at $47.20 per barrel (bbl), with the February contract settling $1.57 higher at $48.17 bbl. ICE February Brent gained $0.98 with a $57.24 bbl settlement.

NYMEX January ULSD futures rallied 5.15 cents to a $1.8054 gallon settlement, with January RBOB futures up 3.58 cents to settle at $1.3863 gallon.

Brian L. Milne can be reached at brian.milne@dtn.com

(BAS)

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