WTI, Brent Erase Gains on USD, Fading Geopolitical Risk

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Erasing midmorning gains, nearby delivery West Texas Intermediate futures and Brent crude traded on the Intercontinental Exchange settled Thursday's session lower under pressure from a rallying U.S. Dollar Index following a better-than-expected reading for U.S. fourth-quarter gross domestic product and hawkish inflation assessment from U.S. Federal Reserve Chairman Jerome Powell, while easing geopolitical risk around tensions along the Russian-Ukrainian border further weighed on the crude complex.

On the session, West Texas Intermediate futures for March delivery fell $0.74 to finish at $86.61 barrel (bbl), with losses accelerating post-settlement, and international crude benchmark Brent crude dropped to $89.34 bbl after hitting an intra-session high of $91.04 bbl -- the highest trade since July 2014. NYMEX RBOB February contract spent most of the session in the green but slipped 0.19 cents in market-on-close trade to settle at $2.2510. Exception in the complex was the front-month ULSD contract that rallied 5.05 cents or 2.3% to $2.7945 gallon, supported by ongoing robust U.S. demand for middle distillates.

Many bearish factors began to weigh on the oil complex Thursday afternoon.

Geopolitically, the narrative of an imminent Russian invasion of Ukraine appears to be evaporating after United States and North Atlantic Treaty Organization delivered a written response to Russia's security demands in Europe -- a move that the country's top diplomats described as "a start of serious conversation on secondary questions." Russia's Foreign Minister Sergei Lavrov cautioned, however, that the document still has not addressed the main question of NATO's expansion to the east, although he welcomed the breakthrough in negotiations. Details of the response have not been made public, but the first links have hit Russian news wires on Thursday, suggesting NATO offered Moscow access to missile installations located in Poland to ensure their defensive purpose.

Thursday's lower settlements were also spurred by a rallying U.S. Dollar Index that settled the session at the highest level since July 2020 at 97.242, up 0.87% against a basket of foreign currencies. The greenback's rally came on the back of better-than-expected reading on U.S. gross domestic product that surged 6.9% in the final three months of 2021 compared with an expected 5.7% annual growth rate. The reading marked the fastest expansion of U.S. gross domestic product since the third quarter 2020 when the economy roared back from pandemic-induced lockdown measures.

The roaring growth seen in the final months of 2021 is unlikely to repeat itself this year, according to economists, as U.S. Federal Reserve moves to a period of monetary tightening to rein in inflation while Americans are spending their savings. At a news conference following the conclusion of the Federal Open Market Committee's two-day policy meeting on Wednesday, Fed Chairman Jerome Powell said the central bank doesn't exclude the scenario of raising interest rates at every FOMC meeting this year. There are seven more FOMC meetings in 2022.

The International Monetary Fund lowered its U.S. economic growth forecast for this year by 1.2% to 4%, citing uncertainty surrounding the pandemic, inflation, supply disruptions and tightening U.S. monetary that pose risk to an expansion. The revised outlook also removed President Biden's Build Back Better fiscal policy package from its baseline projection after failure to pass the original bill.

IMF expects global GDP to weaken from 5.9% in 2021 to 4.4% in 2022 -- with this year's figure being 0.5% lower than previously estimated.

"The global economy enters 2022 in a weaker position than previously expected," said the IMF, highlighting "downside surprises" such as the emergence of the omicron COVID variant, and subsequent market volatility, since its October forecast.

China is expected to grow 4.8% this year, down 0.8% from earlier estimates amid disruptions caused by its zero-COVID policy, as well as "projected financial stress" among its property developers.

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

Liubov Georges