DTN Oil

WASHINGTON (DTN) -- West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange rallied to seven-year highs on Wednesday following a bullish U.S. inventory report detailing a fourth consecutive weekly decline in Cushing stockpiles, accompanied with an unexpected drop in domestic crude production, and despite a stronger U.S. Dollar Index, which rallied this afternoon following a clear signal from the Federal Open Market Committee that the central bank will soon lift the federal funds rate.

FOMC on Wednesday said the Federal Reserve could start raising interest rates as soon as March in an effort to tackle surging inflation.

"With inflation well above 2% and a strong labor market, the committee expects it will soon be appropriate to raise the target range for the federal funds rate," FOMC said in a statement Wednesday afternoon following their two-day monetary policy meeting.

The committee also confirmed market expectations that the central bank will end its monthly bond purchasing program by early March. Beginning in February, the Fed will increase its holdings of Treasury securities by at least $20 billion per month and mortgageâ??backed securities by at least $10 billion per month, reducing total monthly purchases by $30 billion.

At a post-meeting news conference, Fed Chairman Jerome Powell added, "There's quite a bit of room to raise interest rates without threatening the labor market. We don't rule out raising rates at every FOMC meeting."

Stocks on Wall Street rose in initial reaction to the policy statement and before Powell's speech. However, the market reversed those gains as the Fed chief spoke, continuing a pattern of volatility this week in equity markets. Dow Jones Industrials fell 130 points at the market close and S&P 500 declined 0.15%.

Shrugging off the stronger dollar, oil futures rallied midday to their intraday highs, including a push above $90 barrel (bbl) by the Brent contract, following a statement from the U.S. State Department that their intelligence showed "every indication" Russia will use military force in Ukraine by mid-February.

Russia submitted a security proposal to the United States in December urging the U.S. to pledge that they would not allow Ukraine to join the North Atlantic Treaty Organization and to commit to a withdrawal of NATO forces from the region. U.S. Secretary of State Antony Blinken announced Wednesday Washington delivered a written response to those demands that "sets out a serious diplomatic path forward should Russia choose it," telling reporters Wednesday that he expects to have a follow-up discussion with Russian Foreign Minister Sergey Lavrov in the coming days now that the document has been received in Moscow. The situation remains fluid.

WTI futures for March delivery rallied $1.75 to settle at $87.35 bbl, and international crude benchmark Brent finished a tad below $90 bbl, up $1.76 on the session, after trading at $90.47 bbl. NYMEX February RBOB futures advanced 6.34 cents to $2.5229 gallon, and the front-month ULSD contract surged 7.49 cents or 2.2% to $2.7440 gallon.

Oil futures were advancing sharply ahead of the State Department's statement after the U.S. Energy Information Administration midmorning showed total crude and oil product stocks fell to their lowest since July 2014 at 1.78 billion bbl -- about 7% below the five-year average. The drop in stockpiles was realized as domestic oil production declined by 100,000 barrels per day (bpd) last week to 11.6 million bpd instead of expectations for a rebound amid a stronger price environment. U.S. crude production is still 1.4 million bpd below March 2020 level when COVID-19 pandemic shut in a large chunk of domestic output. Oil stored at the Cushing delivery hub in Oklahoma, meanwhile, fell 1.8 million bbl from the previous week to 31.7 million bbl. At this level, Cushing inventories stand more than 30% below the five-year average and at the lowest since October 2018.

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