Oil Futures Sink on US Dollar Rally, Early Equities Selloff

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 accelerated losses in afternoon trade Monday, sending both the U.S. and international crude benchmarks as much as 2% lower. The losses came amid a steep selloff in global financial markets and rapidly strengthening U.S. dollar index ahead of a two-day Federal Open Market Committee meeting when central bank officials are expected to signal the first interest rate hike in three years to combat inflation, while escalating tensions along the Russian-Ukrainian border have further spooked the markets.

On the session, West Texas Intermediate March contract retreated $1.83 to settle at $83.31 per barrel (bbl) after trading as high as $86.09 per bbl earlier in the session, and Brent crude for March delivery declined $1.62 for a $86.27-per-bbl settlement. NYMEX February RBOB futures plummeted 4.44 cents or 1.5% to $2.3980 per gallon, and the front-month ULSD contract plunged 6.38 cents to $2.6274 per gallon.

A rallying U.S. dollar index, which gained 0.28% against a basket of foreign currencies to end the first trading day of the week at 95.901, pressured WTI futures.

U.S. stock market selloff intensified on Monday, sending the S&P 500 into correction territory and Dow Jones Industrials losing as much as 1,000 points midsession before selling relented, with the S&P 500 Index and DJIA both ending trading with modest gains. Oil futures moved off intrasession lows with the reversal in equities.

The CBOE Volatility Index or VIX, known on Wall Street as the market's "fear gauge," hit its highest level since November 2020, underscoring heightened volatility in the financial market. The rising VIX comes ahead of this week's FOMC meeting in which central bank officials might offer further details on an expected increase in the federal funds rate, and in their unwinding of their monthly bond purchases. Investors currently assign 86.7% probability that the central bank will increase the overnight lending rate by 25 basis points at its March 16 meeting.

Complicating the Fed's call on interest rates is high-frequency data suggesting the economy has slowed sharply in recent weeks, pressured by surging omicron cases and COVID shutdowns. Restaurant reservations and passenger throughput at U.S. airports dropped around 30% below pre-pandemic levels. Worker absenteeism due to COVID quarantining also appears to be affecting economic activity with the potential for a decline in January non-farm payrolls, according to the economists.

Further weighing on investor sentiment is a possible escalation in armed conflict between Ukraine and Russia, with both sides amassing troops and weaponry along their shared border. On Monday, the Pentagon announced it was readying the deployment of 8,500 troops into eastern Europe should Russia invade Ukraine, which follows Sunday's decision by the U.S. State Department to instruct families of U.S. diplomats in Ukraine to leave the country.

The North Atlantic Treaty Organization is sending thousands of ships and fighter jets to bolster the Ukrainian army. In the eight years since Russia annexed Crimea, Ukraine's army has mostly traded sniper and artillery fire with Russia-led separatists in the eastern parts of the country. Today, the threat of war appears to be more real than ever.

European natural gas prices surged more than 15% Monday as heightened fears that any Russian incursion into Ukraine would lead to sanctions and potential retaliatory action from Russia by cutting energy supplies to Europe. Russia is the dominant supplier of natural gas to Europe, accounting for 40% to 50% of European gas imports.

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

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

Liubov Georges