DTN Oil

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest to delivery and the front month Brent contract traded on the Intercontinental Exchange are extending losses into a third session early Thursday. West Texas Intermediate and Brent crude are moving below their 50-day moving averages to trade near three-week lows ahead of the afternoon expiration of the June WTI contract following Wednesday afternoon's release of minutes for April's Federal Open Market Committee meeting in which some central bank officials discussed tapering asset purchases by the Federal Reserve.

Commodities and equities have been under pressure in mid-May following revelation inflation picked up pace faster than expected in April while expected large gains in employment failed to materialize, putting Fed's easy monetary policy under scrutiny. The central bank has two primary goals, to ensure price stability by keeping inflation under control and to maximize employment.

Fed chairman Jerome Powell joined by a chorus of central bank officials have repeated that the Fed could tolerate inflation above their 2% target for a while in an effort to maximize employment, indicating they would maintain the federal funds rate in a 0- to 25-basis-point range for an extended period of time. The federal funds rate determines interest rates consumers pay as well as setting the borrowing rate for businesses and traders.

Fed's easy monetary policy also includes monthly asset purchases by the central bank of $120 billion, with $80 billion in spending for Treasury securities and $40 billion in mortgage-backed securities. In April, FOMC officials reiterated their support in maintaining this policy "until substantial further progress" has been made in achieving their goals.

Yet, markets see cracks in the levee, with some officials during April's FOMC meeting commenting that the Fed should begin discussions on tapering the $120 billion in monthly asset purchases, while "a couple of participants" also pointed to growing risk of inflation that could build "to unwelcome levels before they become sufficiently evident to induce a policy reaction," according to the minutes.

Those observations were made before the Bureau of Labor Statistics in early May reported inflation in April grew annually at a more-than-expected 4.2% rate, the fastest pace since the Great Financial Crisis in September 2008 when Lehman Brothers collapsed. Employment growth in April also missed by a wide mark, with 266,000 new jobs below expectations that crested over one million.

Powell has explained the April jump in inflation is transitory, a response to pent-up demand due to the COVID-19 lockdowns. Many agree with this viewpoint while others suggest the Fed could be mugged by reality.

Weekly jobless claims are the next indicator on the topic due for release shortly, with the Labor Department expected to report new initial jobless claims continued their decline during the week-ended May 15, seen falling 13,000 to 460,000.

The current selling was triggered on Tuesday when a Russian official suggested a breakthrough in negotiations between Washington and Tehran on resurrecting the 2015 Joint Comprehensive Plan of Action that the United States withdrew from in May 2018 during the Trump administration. Such an agreement would undoubtedly include an end to U.S. sanctions on Iranian oil exports as demanded by Tehran. Analysts have suggested this could push as much as 2 million barrels per day (bpd) of additional oil on the market.

Analysts with Bank of America Global Research suggest the market's view of new Iranian oil barrels is overblown, while noting nearly 1 million bpd of exports from Iran are already occurring. They estimate Iranian oil exports would likely range no more than 1.3 million bpd considering domestic needs and lost production in recent years.

In early trading, NYMEX June WTI futures were down $0.65 at $62.71 per barrel(bbl), with the July contract trading at a $0.05 discount. ICE July Brent futures were down $0.85 at $65.81 bbl. NYMEX June RBOB futures were 1.65 cents lower at $2.0855 gallon, with the June ULSD contract down 2.10 cents near $1.9860 gallon.

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