DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange extended lower in early trade Friday, with all contracts heading for weekly losses on a combination of bearish factors, including rising domestic crude oil inventories, strength in the U.S. Dollar Index and growing fears over slower-than-expected demand growth in the fourth quarter tied to surging energy prices and a pullback in consumer spending.

Near 7:30 a.m. ET, NYMEX West Texas Intermediate futures for December delivery retreated $1.62 or 2% to trade just below $80 per barrel (bbl), and the international crude benchmark Brent contract for January declined to $81.38 bbl, down $1.82 on the session so far.

NYMEX RBOB December futures dropped 5.36 cents or more than 2% to $2.2652 gallon and front-month NYMEX ULSD futures fell 6.01 cents to $2.3870 gallon, with both products contracts falling to five-week lows on their spot continuation charts overnight.

Both WTI and Brent are trading near one-week lows Friday morning, with investors reassessing their expectations for global demand growth in the coming months amid surging U.S. inflation and lower industrial output elsewhere.

Eurozone industrial production declined for the second consecutive month in September, showed data published by Eurostat Friday morning, underscoring continued issues with global supply chains. German automotive sectors, in particular, were hard hit by semiconductor shortages and companies from other industries are also struggling to obtain a wide variety of inputs and components.

Earlier this week, Organization of the Petroleum Exporting Countries downgraded their demand projections for China and India, where their economies are under pressure from rolling power blackouts and resurgent COVID-19 infections, among other factors. At 96.4 million barrels per day (bpd), worldwide oil consumption this year is now seen about 5% below the pre-pandemic level, according to OPEC economists.

In outside markets, U.S. Dollar Index slightly softened in overnight trade after trading at a 17-month high at 95.270, pressuring the oil complex by making dollar-denominated oil more expensive for overseas buyers.

Greenback saw the resurgence of buying interest this week after U.S. Bureau of Labor Statistics on Wednesday reported domestic inflation spiked to 30-year high 6.2% in the 12 months ending in October, sending shockwaves through financial markets. Price increases were broad-based, spreading well beyond parts of the economy that were most affected by the pandemic.

Economists estimate domestic inflation could breach 7% by year-end before gradually easing in mid-2022. This scenario will likely force the hand of U.S. Federal Reserve to wrap up bond-buying stimulus program earlier than expected to position the markets for the first interest rate hike since March 2020.

The Fed has already begun to back away from the narrative of "transitory inflation" in recent weeks, with a growing number of officials leaning toward raising interest rates next year instead of waiting until 2023. The high level of inflation, now three times above the central bank's targeted 2%, will be a driving force in determining market direction heading into the final weeks of the 2021 trading year.

The CME Group's FedWatch tool is now pricing in a 68.8% chance of a rate hike by June of next year, notably earlier than prior forecasts, while the benchmark two-year Treasury note yields are trading at 0.536%, more than double the Fed's target range of between 0% and 0.25%. Next, investors will turn their focus to U.S. consumers sentiment index published by University of Michigan at 10 a.m. ET, with consensus calling for Americans to feel slightly more optimistic about the economy and the labor market. The survey was taken before Wednesday's consumer price index for October was released.

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