Oil Futures Slip as USD Surges on Hawkish Fed

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- With the U.S. Dollar Index surging and treasury yields rising, crude and refined products futures on the New York Mercantile Exchange along with Brent crude on the Intercontinental Exchange slipped lower in early trade Thursday after a surprisingly hawkish Federal Open Market Committee meeting on Wednesday signaled an earlier-than-expected interest rate hike and set up the possibility of a near-term tapering of its monthly bond purchases.

The U.S. dollar rallied 0.63% against a basket of foreign currencies to trade near a two-month high 91.830 following comments from Federal Reserve Chairman Jerome Powell suggesting the talk of tapering $120 billion a month in the purchase of government bonds and mortgage-backed securities would now take place at all future meetings as the economy rebounds from the coronavirus-induced recession faster-than-previously expected. The central bank first began its massive bond-purchasing program in March 2020, ensuring the flow of credit and the ability of the market to function as businesses were ordered to lock down.

Economic projections released by the Federal Reserve Wednesday, which guide future policy action, suggest the central bank will lift the benchmark federal funds rate twice in 2023 now that inflation is likely to run at a hotter-than-expected pace through the end of the year. The Fed has significantly raised its inflation forecast this year to 3.4% compared to the previous estimate of 2.4%.

At a news conference Wednesday afternoon following the two-day policy meeting, Powell said inflation over the past couple of months had come in above expectations, but added the categories affected by the economy's reopening were seeing the biggest gains, so transitory.

U.S. Bureau of Labor Statistics previously reported the consumer price index increased 0.6% in May after rising 0.8% in April, while up 5% year-on-year last month. This marked the largest 12-month increase since a 5.4% spike for the period ending August 2008.

The economy, meanwhile, is seen growing at a 7.0% annualized rate in 2021 compared to the 6.5% forecast from its economic projection released in March. The Fed also raised its 2023 real GDP forecast from the previous 2.2% to 2.4%.

On the economic calendar Thursday, U.S. jobless claims are expected to have fallen to a new pandemic low of 360,000 during the week ended June 12, signaling continued recovery in the U.S. labor market.

The stronger dollar weighed on the oil complex early Thursday, although a larger-than-expected 7.4-million-barrel (bbl) draw from the U.S. commercial crude oil supplies continued to lend support. Wednesday's inventory report also showed a 1 million bbl decline in distillate supplies and a big jump in demand for petroleum products.

On the bearish side, gasoline stockpiles unexpectedly rose 2 million bbl last week and U.S. crude oil production increased 200,000 barrels per day (bpd) to 11.2 million bpd -- the highest output rate in more than a year. Gasoline supplied to the U.S. market, a measure for demand, climbed above 9 million bpd to 9.4 million bpd.

In early trade, NYMEX July RBOB futures were modestly higher near $2.1620 gallon and July ULSD futures fell 0.5 cents to $2.0984 gallon. NYMEX West Texas Intermediate July contract traded marginally lower near at $72.05, and the international crude benchmark August Brent contract slipped $0.20 to near $74.20 bbl.

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

Liubov Georges