Oil Rallies as Fed Eases Inflation Fears

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Another day of risk-on trade in financial markets and positive vaccine news propelled oil futures on the New York Mercantile Exchange and Intercontinental Exchange to fresh 13-month highs on Wednesday, sending the U.S. crude benchmark above $63 as investors positioned for a post-pandemic economic rebound juiced by massive stimulus measures and rock-bottom interest rates from the U.S. Federal Reserve.

Jerome Powell, chair of the Federal Reserve, told lawmakers on Wednesday the central bank planned to maintain its growth-stoking policies for the foreseeable future, including near-zero interest rates and the Fed's large-scale bond-buying program. The Fed slashed interest rates to near-zero last March and is buying about $120 billion in government-backed bonds each month, policies aimed at fueling lending and spending.

"Although there has been much progress in the labor market since the spring, millions of Americans still remain out of work ... we intend to keep our policy supportive of the ongoing recovery," said the Fed chair during Wednesday's testimony to the House Financial Services Committee.

Powell also noted that higher bond yields were a reflection of investor confidence in an economic recovery, not concerns about inflation.

Not everyone agrees. Some economists suggest the turbocharged rally in commodity markets over the recent weeks is a good barometer of coming inflation. Indeed, commodities sensitive to the "reopening" trade like copper and oil surged over 20% since the start of 2021.

Further supporting the "reopening" narrative, the United States has made tremendous progress in vaccination efforts over recent weeks, delivering 65 million doses since the onset of the immunization program on Dec. 14, 2020. Continuing that progress, the Food and Drug Administration on Wednesday backed Johnson & Johnson's single-dose coronavirus vaccine as safe and effective ahead of a Friday meeting in which a panel of experts are expected to recommend the vaccine for emergency use.

The Biden administration anticipates shipping out three to four million doses of the J&J vaccine next week. Should the FDA authorize the Johnson & Johnson shot, it would be the third COVID-19 vaccine and first single-shot vaccine available in the United States following the two-dose vaccine regime produced by Pfizer and Moderna. Some health officials believe the United States has turned the corner on the pandemic, with daily new cases having fallen roughly 74% since its winter peak.

Against this backdrop, markets largely overlooked a mostly bearish inventory report from the U.S. Energy Information Administration on Wednesday, showing an unexpected increase in domestic crude and gasoline supplies as demand for refined fuels fell sharply amid a hostile Winter Storm Uri. U.S. oil production plunged to its lowest level in two years last week, at 9.7 million barrels per day (bpd), while refinery throughputs dropped to a level not seen since the Great Financial Crisis of 2008 at 12.23 million bpd. The dataset is expected to improve in the coming weeks as Texas refiners and producers restore operations.

At settlement, West Texas Intermediate futures for April delivery surged $1.55 to $63.22 barrel (bbl) and front-month Brent futures on ICE advanced $1.67 to settle above $67.04 bbl. NYMEX March ULSD future rallied 4.03 cents to $1.9083 gallon and front-month RBOB contract spiked 3.7 cents to $1.8956 gallon.

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

Liubov Georges