Oil Off Lows on Tighter Supplies

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Following a sharp selloff triggered by a surging U.S. dollar and volatility in stock markets, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange bounced higher in overnight activity to trade little changed, supported by prospects of short-term supply scarcity on the global oil market tied to concerns over OPEC+'s ability to quickly raise production joined by escalating tensions in Eastern Europe and Middle East that heightened geopolitical risk premium in oil prices.

Near 7:30 a.m. ET, West Texas Intermediate futures for March delivery faded overnight gains to trade near $83.38 per barrel (bbl) after jumping above $84 bbl in overnight trading, and international crude benchmark Brent advanced $0.35 to $86.60 bbl. Both benchmarks fell as much as 2% on Monday. NYMEX February RBOB futures gained more than 1 cent to trade near $2.4094 gallon, and the front-month ULSD contract traded little changed near $2.6269 gallon.

Oil's move higher came despite ongoing strength in the U.S. dollar index that spiked more than 0.3% against a basket of foreign currencies to near 96.215 level. Greenback continues to find support on expectations that the Federal Open Market Committee might tighten monetary policy more aggressively than previously expected to rein in surging inflation that came in at 7% in December -- the highest in 40 years.

FOMC begins its two-day policy meeting today and is expected to signal the first interest rate hike in three years in March, while unwinding its monthly bond purchases. The Fed is currently buying $60 billion of bonds each month -- half the level prior to the November taper and $30 billion less than in December. Goldman Sachs forecasts at least four hikes in the federal funds rate this year. CME Group's FedWatch tool sees a small chance for the central bank to announce a rate hike Wednesday, and overwhelmingly a 25-basis point increase on March 16 when FOMC meets next.

The VIX volatility measure in the stock market, surged to the highest level in nearly a year ahead of the statement from the Federal Reserve along with some of the key economic data in the United States. On Thursday, Bureau of Economic Analysis will release its first estimate of a fourth quarter gross domestic product, followed by Fed's preferred inflation gauge- personal consumption expenditures for the final month of 2021.

Stocks on Wall Street staged a dramatic turnaround in the last 15 minutes of cash trading Monday to finish broadly higher after Dow Jones Industrial plunged more than 1000 points mid-session. Oil futures moved off intrasession lows with the reversal in equities.

On Wall Street, futures tied to the Dow are once again indicating a 190-point opening bell decline, while those linked to the S&P 500 are priced for a 48-point retreat. Nasdaq Composite futures are indicating a 235-point slide.

The risk of an all-out war between Russia and Ukraine will likely dominate the headlines in coming days, fueling the bullish sentiment in the oil markets. European natural gas prices turned mixed in early trading Tuesday after surging more than 15% on heightened risk of Russian invasion into Ukraine and possible sanctions on Russia energy exports. Gas flows from Germany to Poland via the Yamal-Europe pipeline, which usually sends Russian gas west into Europe, have declined in the past 48 hours, showed data from German network operator Gascade. The pipeline has operated in reverse mode since Jan. 21st as traders rely on available stockpiles to supply European buyers and avoid paying near record-high import prices. Gas is being lifted from Europe's underground storage facilities in Germany, according to analysts, raising questions over rationality of draining stocks at the peak demand winter season. Some European countries, including Finland, Lithuania and Hungary meet nearly 70% of their energy demand with Russian gas imports. Developing crisis on the European gas market could quickly spill over into broader energy markets, supporting the oil prices.

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

Liubov Georges