DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled Tuesday's session mixed, with the U.S. and international crude benchmarks and gasoline contracts pausing an advance from March lows while the diesel contract registered its fifth session gain. The moves came as traders look to bridge the gap between a globally tight oil market and tightening monetary policy in the United States aimed at tackling inflation but would also slow economic growth.

Crude and oil product traders are contending with numerous crossroads, including supply scarcity and the potential for lost demand amid inflation pressures, and war in Ukraine that further exacerbates a global supply shortfall, but also sends price signals for increased production.

Federal Reserve Chair Pro Tempore Jerome Powell in a speech on Monday in Washington, D.C., struck a more hawkish tone than on March 16, when the Federal Open Market Committee announced the first hike in the federal funds rate since 2018. The market's immediate response following the widely expected 25-basis-point increase announcement was that the central bank would take a slower path in combating inflation, mindful of the economic destruction caused by Russia's war in Ukraine. Instead, Powell was forceful in tone on Monday, indicating the possibility of one or more 50-basis-point rate hikes at coming meetings, and that the Fed would aggressively work to reduce inflation even if that meant tightening monetary policy to the point it slows economic growth.

Following Monday's speech, Goldman Sachs, in a note to clients, said it expects the Fed to lift the federal funds rate by 50 basis points at both its May and June FOMC meetings. FOMC meets six more times in 2022, with the Fed's dot-plot released March 16 showing a rate hike at each of those meetings.

Climbing interest rates will slow economic growth and demand for fuel, with the Atlanta Federal Bank's GDPNow model estimating first-quarter U.S. gross domestic product annualized growth at 1.3%, slowing from a 7% expansion by the U.S. economy in the fourth quarter 2021, according to estimates by the Bureau of Economic Analysis. The GDPNow outlook was last updated on March 17, with the next update scheduled for Thursday, March 24.

Traders also took a cautious approach to trading Tuesday following a strong rally over the previous three sessions as they gauge the prospect of more oil supply coming online, incentivized by $100-per-barrel (bbl) oil prices in the wake of Russian President Vladimir Putin's Feb. 24 invasion of Ukraine, which prompted U.S. sanctions on Russian oil, coal, and LNG imports. Western companies are increasingly shunning Russian oil, with TotalEnergies the latest company to announce a gradual withdrawal from the aggressor nation. These developments prompted the International Energy Agency last week to estimate a 3 million barrel-per-day (bpd) decline in Russian oil production in April, with the Organization of the Petroleum Exporting Countries' most recent assessment pegging Russian oil output at 11.45 million bpd.

Saudi Arabia seems poised to lift crude oil production, with state-owned Aramco on Sunday indicating a 50% increase in investments this year. Additionally, and despite bipartisan pushback, the Biden administration seems intent in moving ahead with the resurrection of the Joint Comprehensive Plan of Action that would end U.S. sanctions on Iranian oil exports if reached, adding more oil to the market. The Biden administration has also made overtures to Venezuela, with oil exports from the OPEC country also sanctioned.

U.S. oil production growth is expected to increase slowly this year despite high oil prices and prodding from the While House, with the Biden administration and Democrats at large fearful of high retail gasoline prices heading into midterm elections in November, which reached a record national high at $4.315 gallon earlier this month, according to the Energy Information Administration.

"However, the reality is that even if [U.S. oil exploration and production companies] wanted to, E&P's are pointing to all kinds of bottlenecks -- people, equipment, flaring, infrastructure. So even if they wanted to, it wouldn't make a material difference for some time (6m plus)," said Doug Leggate, with Bank of America Global Research in a client note out Tuesday. "But it's not clear there is an appetite to backtrack on the capital discipline that has their stock prices making new highs."

NYMEX April WTI futures expired down 36 cents at $111.76 per bbl, with the May WTI contract widening its discount to the now-expired contract to $2.49 per bbl with a $109.27 settlement. ICE May Brent futures settled down 14 cents at $115.48 per bbl. NYMEX April RBOB futures settled 4.09 cents lower at $3.3307 per gallon, and April ULSD futures registered a 6.33-cent gain with a $3.8642-per-gallon settlement.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian L. Milne can be reached at brian.milne@dtn.com