Oil Futures Erase Early Losses on Weak PMIs on Fed Stance

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Nearby delivery oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange shook off early losses in midmorning trade Thursday as market participants shrugged off weaker-than-expected readings for European and U.S. services and manufacturing in September. Oil futures found support from the Federal Reserve after it signaled Wednesday it was not immediately pulling back on accommodative monetary policy, signaling it could raise interest rates in 2022 and end its massive bond-purchase program enacted at the start of the COVID-19 pandemic by the middle of next year.

At last look, NYMEX November West Texas Intermediate gained $0.70 to trade near $72.95 barrel (bbl) and Brent crude for November delivery advanced $0.50 to trade near $76.70. NYMEX October ULSD futures traded 0.75 cents higher near $2.2190 gallon, and front-month RBOB futures was flat near $2.1235 gallon.

The manufacturing component of the composite Purchasing Manager's Index for Eurozone dropped to 58.7 this month from 61.4 in August, missing market expectations of 60.3, preliminary estimates from private survey showed. The latest reading pointed to a third successive month in which growth has slowed in the sector since the June survey's record expansion, and to the greatest extent since February. The rate of growth for both output and new orders eased to an eight-month low, primarily linked to supply chain constraints, as well as concerns over the ongoing pandemic. New export orders also grew less, and the pace of job creation moderated to a six-month low. Meanwhile, supplier delivery times lengthened at an increased rate in September, continuing to extend to a degree greatly exceeding anything seen prior to the pandemic.

The Federal Open Market Committee signaled at the conclusion of its two-day meeting Wednesday afternoon it could start tapering $120 billion a month in bond and mortgage-backed securities purchases as early as November should the U.S. economy continue to recover at its current pace.

Fed Chairman Jerome Powell told reporters in a post-meeting press conference "asset purchases are still useful, but it's time to reduce them," adding, "It will be suitable to finish tapering around the middle of next year."

Still, he clarified that tapering will not necessitate an immediate rate liftoff and left the possibility the Fed may wait longer if needed.

Updated economic projections released by the Federal Reserve show nine of the 18 Fed officials expect to raise rates once to about 0.5% in 2022, sooner than they anticipated in June.

Central bank officials lowered their 2021 economic growth forecast to 5.9% from 7% expected in June, while raising headline inflation expectations to 3.7% this year -- almost a full point higher than their June forecast, when officials projected it would hit 3%. The Fed's preferred inflation measure, the personal consumption expenditures excluding food and energy prices, surged 3.6% in July, the highest level in 30 years. Powell has repeatedly called the spike "transitory," and said he expects consumer prices to fall as pandemic-induced bottlenecks subside.

Wednesday's inventory report from the U.S. Energy Information Administration was mostly supportive for the oil complex, showing commercial crude oil supplies declined for the seventh consecutive week through Sept. 17 amid higher demand from Gulf Coast refiners after extended disruption caused by Hurricane Ida in late August. U.S. commercial crude oil inventories have now remained in a destocking pattern for nearly two months, drawing national stocks down by more than 25 million bbl since the first week of August. At 413.964 million bbl, U.S. commercial crude oil stocks now stand about 8% below the five-year average.

On the supply side, domestic production recovered 500,000 barrels per day (bpd) from the previous week to 10.6 million bpd as of Sept. 17, still about 900,000 bpd below the pre-Ida output rate.

Distillate stockpiles also fell above consensus last week, down 2.6 million barrels (bbl) from the previous week to 129.3 million bbl -- about 14% below the five-year average. Demand for distillate fuels, often seen as a proxy for economic activity, surged 629,000 bpd from the previous week to 4.425 million bpd. Diesel demand was up 2.3% relative to the same week in 2019, according to DTN's Refined Fuels Demand data, weakening slightly after being up 2.8% compared to 2019 levels in the prior week.

Bearish parts of the report could be found in gasoline statistics, with stockpiles unexpectedly gaining from the previous week, up 3.5 million bbl versus calls for 1 a million bbl draw, while demand for the motor transportation fuels remained mostly unchanged at 8.896 million bpd last week.

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

Liubov Georges