NYMEX WTI Hammered Lower by Rate Hike

CRANBURY, N.J. (DTN) -- Nearest delivered New York Mercantile Exchange oil futures settled down and near session lows in ending midweek trade, with the West Texas Intermediate crude contract registering a 4.9% loss following the midmorning release of bearish weekly supply data and the afternoon announcement of the first increase in the federal funds rate in 10 years.

In a unanimous decision by the Federal Open Market Committee at Wednesday's conclusion to their two-day meeting, the Board of Governors of the Federal Reserve System announced a 0.25% increase in the federal funds rate from near zero where it has sat since December 2008. The higher rate, albeit still low, ends an era of extraordinary monetary easing deployed during the Great Recession of 2007 to 2009.

In its news release announcing the decision, the Fed said since their last meeting in October, information "suggests that economic activity has been expanding at a moderate pace."

"The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2% objective," said the Fed, noting inflation has been limited, in part, by low energy prices.

Fed Chair Janet Yellen said during a news conference following the announcement that the central bank sees low energy prices as "transitory," while adding inflation has also been stymied by a strong U.S. dollar that has kept a lid on import prices.

As analysts parsed every word from the Fed statement and Yellen's comments, "gradual" was highlighted in noting future rate increases in 2016.

"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."

Yellen said the central bank forecasts annual gross domestic product growth for the United States of 2.1% this year, accelerating to 2.4% in 2016, with the national unemployment rate slipping slightly next year from 5.0% in the fourth quarter. She said the committee saw the risk to labor market and economic activity as balanced.

Yellen highlighted "particularly strong" vehicle sales this year that has supported the economy.

At settlement, NYMEX January WTI crude futures were down $1.83 at $35.52 per barrel (bbl), and near a $35.29 bbl two-day low. WTI crude tumbled to a $34.53 bbl seven-year low on the spot continuation chart on Monday.

The international crude price marker also sold off, with January Brent crude futures traded on the IntercontinentalExchange expiring down $1.26 at $37.19 bbl and near a $37.11 two-day low. On Monday, the contract plumbed a seven-year low on the spot continuation chart of $36.33 bbl. ICE February Brent crude futures settled $1.34 lower at $37.39 bbl.

For oil products, NYMEX January ULSD futures tumbled 3.45 cents to a $1.1122 gallon settlement, ending near a $1.1066 gallon two-day low, holding above Monday's $1.0874 gallon 11-1/2 year low on the spot continuation chart.

NYMEX January RBOB futures settled down 1.16 cents at $1.2328 gallon. Last week, the contract traded at a $1.1956 gallon nearly seven-year low on the spot continuation chart.

The selloff in market-on-close trade came despite the market overwhelmingly expecting the 0.25% interest rate boost. The market was, however, caught off-guard by bearish inventory data for crude oil last week released this morning by the Energy Information Administration.

The EIA reported the 11th increase in U.S. commercial crude supply in the past 12 weeks for the week-ended Dec. 11, with the large 4.8 million bbl opposing expectations that a 1.5 million bbl decline transpired. U.S. crude production also increased, holding above 9.1 million bpd at 9.176 million bpd despite low oil prices, slashed expenditures for drilling, and a tumbling rig count.

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

(CZ)

Copyright 2015 DTN/The Progressive Farmer. All rights reserved.