DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange accelerated losses in afternoon trade Wednesday after the Federal Open Market Committee raised the federal funds rate 25 basis points and signaled additional rate hikes at each of the six remaining meetings this year, a policy shift aimed at tackling the fastest growth in inflation in four decades.

At the conclusion of their two-day policy meeting Wednesday afternoon, the FOMC announced the first increase in the federal funds rate since 2018 and following two years of holding the key benchmark rate near zero to insulate the economy from the pandemic.

"The American economy is very strong and well positioned to handle tighter monetary policy," said Federal Reserve Chairman Jerome Powell during a news conference following the FOMC meeting. "We are attentive to the risks of further upward pressure on inflation and inflation expectations."

Powell added central bank officials could speed the monetary tightening policy if needed.

The Fed also released their first of four economic projections in 2022, with its median forecast for economic growth in 2022 revised down from 4% expected in December to a 2.8% growth rate in real gross domestic product.

"The implications for the U.S. economy are highly uncertain, but in the near term the [Russian] invasion [of Ukraine] and related events are likely to create additional upward pressure on inflation and weigh on economic activity," said Powell.

The Fed ended purchases of Treasuries and mortgage-backed securities this month, an aggressive monetary policy enacted during the early days of the pandemic to ensure market liquidity. The central bank will start to unwind asset purchases, saying Wednesday it would begin allowing its $8.9 trillion balance sheet to shrink at a "coming meeting" without elaborating.

The first rate hike in four years was well telegraphed, with some analysts and monetary policy watchers believing the Fed took too long to take action to combat inflation. The Bureau of Labor Statistics earlier this month reported the Consumer Price Index, a measure of inflation, increased 7.9% year-on-year in February, marking the fourth consecutive month with inflation at a four-decade high. Nonetheless, the rate hike comes amid a horrific war in Eastern Europe that has disrupted trade in oil and commodities out of Russia -- a country with a vast geography and abundance of natural resources.

International Energy Agency said Wednesday the prospect of a large-scale disruption to Russian oil production threatens to create a global supply shock in the short-term. The Paris-based energy watchdog estimates that beginning in April, Russian oil production would fall by 3 million barrels per day (bpd), with the Energy Information Administration pegging the decline in April at a more conservative 750,000 bpd.

"Russia is the world's largest oil exporter, shipping 8 million bpd of crude and refined oil products to customers across the globe. Unprecedented sanctions imposed on Russia to date exclude energy trade for the most part, but major oil companies, trading houses, shipping firms and banks have backed away from doing business with the country," said IEA.

Such a large loss in oil output comes amid an already tight global oil market with limited spare capacity largely held by Saudi Arabia and the United Arab Emirates. Oil production from the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil products, which includes Russia, has underdelivered on quotas since the third quarter 2021.

The steep drop in Russian oil production could be offset by slower demand growth in the second half of the year but only partially, according to IEA. The agency expects global oil demand to average 99.7 million bpd for 2022, revised down by roughly 950,000 bpd from the IEA's previous outlook released before the Feb. 24 Russian invasion of Ukraine. For the second half of the year, IEA cut its projection for demand growth by 1.3 million bpd, while on Tuesday OPEC economists warned the Russo-Ukrainian conflict will have a far-reaching impact on global oil demand growth, adding the situation is currently too fluid to accurately measure the impact.

These developments are occurring against a backdrop of low oil inventories and persistent upward oil price pressures, with IEA estimating global oil stocks at 2.621 billion barrels (bbl), their lowest level since April 2014, while 335.6 million bbl below the five-year average.

The outlooks were followed by weekly stock data from the EIA showing U.S. commercial crude stockpiles increased by 4.3 million bbl to 415.9 million bbl during the week ended March 12 and are now about 12% below the five-year average.

EIA also reported a 3.6 million bbl draw in gasoline stocks for last week to 241 million bbl, with gasoline supplied to market slipping but at the second highest weekly rate in 2022 at 8.944 million bpd. Distillate stocks increased 332,000 bbl to 114.2 million bbl, now about 16% below the five-year average, building as implied demand dropped by a steep 883,000 bpd from the prior week to 3.704 million bpd.

NYMEX April West Texas Intermediate futures settled at a $95.04 bbl, down $1.40, and the lowest close since late February. ICE May Brent futures settled below $100 for a second session, down $1.89 at $98.02 bbl. NYMEX April RBOB futures settled 1.06 cents lower at $2.9875 gallon after a choppy session, while April ULSD futures bucked the trend, settling 7.04 cents higher at $3.1001 gallon.

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