DTN Oil

WASHINGTON (DTN) -- Nearby delivery-month oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange followed equities lower in early morning trade Tuesday, sending the front-month West Texas Intermediate crude contract below $84 per barrel (bbl) amid a strengthening U.S. Dollar Index and rising treasury yields as investors look to the start of Tuesday's Federal Open Market Committee meeting where central bank officials are widely expected to detail the tapering process of $120 billion in monthly bond and mortgage-backed securities purchases.

Those purchases were intended to keep long-term interest loan rates low to encourage borrowing and spending, while guaranteeing the free flow of credit in the pandemic-stricken economy. The Federal Reserve's two-day policy meeting will conclude on Wednesday afternoon, followed by a press conference held by Chairman Jerome Powell who is expected to detail the central bank's vision for near-term monetary policy. FOMC will likely announce steps or pace of its planned reduction of $120 billion a month asset purchases, including $80 billion in monthly Treasury purchases and $40 billion in government-backed mortgage securities, that would be scaled to zero by mid-2022.

By that time, analysts believe the Federal Reserve will introduce its first interest rate increase after holding rates near zero since the pandemic recession struck early last year. Goldman Sachs this week moved forward its forecast for the first lift-off in interest rates to July 2022 from the third quarter 2023.

The Fed's decision this week comes against the backdrop of rising inflation that is now running well above central bank's long held target of 2%, rising by a decade-high 5.4% in the twelve months ending in September. The energy index, a sub-component of Consumer Price Index, rose by a staggering 24.8% from a year earlier, with the gasoline index spiking 42.1% and the index for natural gas rising 20.6%.

Healthy demand from consumers joined with effects of shuttered factories and tight labor markets have all contributed to the escalating price pressures. On Monday, data from the Institute of Supply Management showed the industrial sector in the U.S. continued to lose momentum in October, with factory output remaining constrained by supply-chain bottlenecks. "All segments of the manufacturing economy are impacted by record-long raw materials lead times, continued shortages of critical materials, rising commodities prices and difficulties in transporting products. Global pandemic-related issues -- worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems -- continue to limit manufacturing growth potential," said Timothy R. Fiore, CPSM, C.P.M.

Meanwhile, market participants also await key jobs data due out later this week, with the U.S. Labor Department expected to report the domestic economy added 400,000 new jobs in October, a notably faster pace than the 194,000 seen the previous month.

On Thursday, Organization of the Petroleum Exporting Countries and thirteen producers led by Russia gather for a policy meeting, where the alliance is expected to announce production increase of 400,000 barrels per day (bpd) production for December, in line with their current agreement. Ahead of the ministerial meeting, the OPEC+ technical panel revised lower their expectations for global oil market tightness in the fourth quarter, with the global supply deficit now seen at just 300,000 bpd in the three months ending in December. That's much smaller than the 1.1 million bpd shortfall projected earlier this month. A number of OPEC+ officials have indicated this week that they will stick to the measured production increases despite calls for a more aggressive output hike, with COVID-19 outbreaks and slowing global growth weighing on demand recovery.

Near 7:45 a.m. ET, NYMEX West Texas Intermediate futures for December delivery declined $0.76 to trade at $83.28 bbl, and the January ICE Brent contract fell to $84.21 bbl, down $0.52 from Monday's settlement. NYMEX RBOB December futures softened 1.46 cents to $2.3950 gallon and NYMEX ULSD December futures moved down by 2.04 cents to $2.4824 gallon.

Luibov Georges can be reached at luibov.georges@dtn.com