Oil Futures Drop in Thursday Trade

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Intercontinental Exchange Brent crude dropped back from two-week highs in early trading Thursday, weighed down by a strengthening dollar and drop in U.S. equities after the Federal Reserve signaled a pause in rate-cutting policy Wednesday afternoon.

At 9 a.m. ET, NYMEX September West Texas Intermediate futures were down more than $1 at $57.50 per barrel (bbl), with ICE October Brent $0.85 lower at $64.20 bbl. NYMEX September ULSD futures were down 3.15 cents near $1.9390 gallon, and the September RBOB contract dropped 3.25 cents to near $1.8305 gallon.

Oil futures turned sharply lower post-settlement in response to Fed Chairman Jerome Powell's comments that the first rate cut in a decade was "a mid-cycle adjustment," and additional lowering of interest rates in the coming months is unlikely. The Federal Reserve still announced an expected quarter-point interest rate cut Wednesday afternoon, but disappointed the markets with no plans of additional stimulus for the U.S. economy.

"What the market wanted to hear from Federal Reserve was the beginning of a lengthy and aggressive rate-cutting cycle. As usual, Powell let us down," U.S. President Donald Trump tweeted after the Fed Chairman's press conference.

The U.S. dollar climbed to 98.7 better-than-two year high in overnight index trading, pressuring dollar-denominated assets and equities. U.S. equities nosedived Wednesday afternoon, with Dow Jones Industrial Average tumbling 333.7 points or 1.2% to 26,864.27, and the S&P 500 closed the session 1.09% lower at 2980.38.

The Fed's announcement follows a series of disappointing economic indicators from Asia to Europe, pointing to a contraction in global growth over the last six months. eurozone statics agency said Wednesday night its economy tumbled 1% in the second quarter to an annualized growth rate of 0.8%, a sharp fall from 1.8% in the first three months of the year. Many economists believe that the slowdown was led by contraction in Germany and France's manufacturing sectors—the two export-driven economies in the block.

Oil futures move lower comes despite government data showing a sizable 8.5 million bbl draw in U.S. commercial crude inventories last week, finally bringing stockpiles into alignment with the five-year average. After declining for a seventh consecutive week, domestic crude stocks reached a 38-week low as of July 26, easing investor concerns of an oversupplied market.

However, U.S. crude output reversed sharply higher in the profiled week, gaining a massive 900,000 barrels per day (bpd) last week to 12.2 million bpd, reminding markets of continued strength of shale production. The sharp increase was realized as offshore drilling in the Gulf of Mexico shut-in by Hurricane Barry returned to service.

EIA data also showed gasoline inventories fell for the second straight week, but remained nearly 2% above the five-year average for this time of the year. Distillate fuel supplies reversed lower after five consecutive weeks of gains, with inventory about 3% below the five-year average

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

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