Oil Futures Pullback After Fed Rate Cut

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures nearest delivery and Brent crude on the Intercontinental Exchange retreated into market-on-close trade Wednesday, dragged lower by a rallying U.S. dollar after the U.S. Federal Reserve introduced a second 25 basis point interest rate cut in as many months. Oil futures were already under pressure a second session after Saudi Arabia on Tuesday announced oil production shut-in by a weekend attack would be fully restored by month's end. Building oil stocks in the United States reported at midmorning added to the selling pressure.

Following the Fed rate-cut announcement, the U.S. dollar strengthened to a 98.27 high in afternoon index trade and NYMEX October West Texas Intermediate futures dropped to a daily low of $57.67 barrel (bbl), paring the decline to settle at $58.11 bbl, down $1.23 on the session. NYMEX November WTI narrowed its discount to the October contract to $0.07 ahead of Friday afternoon's expiration. ICE November Brent crude settled down $0.95 at $63.60 bbl. NYMEX October ULSD futures slipped 1.63 cents to end the session at $1.9733 gallon, and the October RBOB contact moved 1.74 cents lower to $1.6577 gallon.

Wednesday afternoon the Federal Reserve unveiled its closely watched decision to reduce interest rates by 25 basis points to the range of 1.75% to 2%, keeping in line with market expectations. The central bank cited weakening global growth and downbeat investment climate as the reason for the cut, which follows a 0.25% reduction this summer -- the first cut in a decade. Afternoon reports indicate the Fed is facing mounting dissent on the outlook for further monetary easing, as it seeks balance between shielding economic expansion against global uncertainties and keeping a low inflation rate. The central bank did revise higher its forecast for U.S. economic growth by 0.1% to 2.2% for the current year.

Saudi Arabia's defense ministry said Wednesday it recovered weapons debris that showed Iran is unquestionably behind the attack on the kingdom's oil infrastructure. Saudi officials added that a forensic investigation identified southwest Iran as the location where the attack was launched from and that it was carried out with a high degree of precision that is believed to be beyond the capacity of Iran-aligned proxies in Yemen.

According to wire services, U.S. President Donald J. Trump is expected to announce a substantial increase in sanctions against Tehran this week. U.S. Secretary of State Mike Pompeo was scheduled to meet Crown Prince Mohammad Bin Salman on Wednesday to discuss a response to the attack on Saudi Arabia that shut-in 5.7 million barrels per day (bpd) in crude output, more than half of the country's oil production.

The Saudi's ability to maintain exports and to quickly restore lost oil production reassured the market, prompting a second lower session for oil futures.

"Not a single shipment to an international customer has been or will be missed or canceled as a result of these attacks. We have proven that we are operationally resilient and have confirmed our reputation as the world's leading supplier," said Saudi Aramco President and CEO Amin Nasser in a news release Tuesday. "The company has met its commitments to its International customers, even in challenging situations, including past Gulf conflicts."

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

(CZ)