Oil Futures Gain on Dovish Fed Ahead of US Q2 GDP Reading

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Nearby delivery month oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange pushed higher in early trade Thursday, supported by a weakening U.S. dollar and rallying equities as investors are emboldened by the Federal Reserve's dovish stance on fiscal stimulus and accelerated economic growth in the second quarter, with expectations for lingering effects of accommodative monetary policy combined with strong consumer demand to continue to fuel growth.

U.S. economic activity likely accelerated from 6.4% in the first quarter to 8.5% during the April through June period, according to economic forecasts. The expected increase in quarterly gross domestic product would be the biggest since 1983, excluding the 33.4% jump in the third quarter of 2020. Should second quarter GDP match expectations, output in the economy would return to its pre-pandemic level seen in fourth quarter of 2019. The U.S. Bureau of Economic Analysis will release its advanced second-quarter GDP estimate at 8:30 a.m. EDT.

Many economists, however, expect last quarter to mark the top of the U.S. post-pandemic recovery, with effects of government stimulus fading and rising consumer prices seen offsetting that growth.

Federal Reserve pledged this week to keep accommodative monetary policy in place until "substantial further progress" is made towards stable prices and maximum employment. The central bank decided not to raise interest rates from near zero or adjust the pace at which it buys government bonds each month.

"As long as COVID is running loose out there, as long as there is time and space for the development of new strains, no one's really safe. These strains, there's no reason they just can't keep coming...one more powerful than the next," said Fed Chairman Jerome Powell during a Wednesday afternoon news conference following the conclusion of a two-day policy meeting by the Federal Open Market Committee.

Fed officials, however, indicated they have begun discussions on curtailing asset-purchasing programs, but the progress that has been made so far is seen as insufficient to alter bond buying activity by the central bank.

"With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen," said the Fed in their updated policy statement released Wednesday. "The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses."

Further supporting the oil complex, U.S. commercial crude oil inventories fell by a larger-than-expected 4.1 million barrels (bbl) last week to about 7% below the five-year average at 435.6 million bbl, according to government data released Wednesday. Gasoline inventories decreased by 2.3 million bbl last week to 234.2 million barrels per day (bpd), and now match the five-year average. Demand for motor fuel edged higher for the second consecutive week to 9.325 million bpd, bringing the four-week average to 9.5 million bpd, just slightly below 9.6 million bpd demand rate during the comparable four weeks in 2019. Distillate inventories also fell by a larger-than-expected 3.1 million bbl to 137.9 million bbl and remain about 5% below the five-year average. Total commercial petroleum inventories decreased by 6.5 million bbl last week.

Near 7:30 a.m. EDT, NYMEX September West Texas Intermediate advanced $0.30 to trade near $72.70 bbl, and ICE September Brent contract moved above $75 bbl, up a modest $0.34 bbl, while narrowing its premium to October Brent futures to $0.83. NYMEX August RBOB contract clawed back 0.68 cent to $2.3150 gallon and next-month delivery September futures narrowed its discount to the expiring contact to 2.69 cents gallon. NYMEX August ULSD contract gained 0.88 cent to $2.1648 gallon, with September futures near flat with August delivery at $2.1671 gallon. ICE September Brent, and NYMEX August ULSD and RBOB futures expire Friday afternoon.

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

Liubov Georges