DTN Oil

WASHINGTON (DTN) -- At the start of the first trading session for May, West Texas Intermediate futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell more than 3% while the U.S. Dollar Index rallied as investors positioned ahead of this week's Federal Open Market Committee meeting when central bank officials are expected to raise interest rates by 50 basis points to confront the worst inflation in 40 years.

The U.S. Dollar Index regained upward momentum in early trade Monday, after climbing to the highest level seen in 20 years at 103.395 against a basket of foreign currencies late last week, making dollar-denominated commodities such as oil more expensive for overseas buyers.

The greenback's strength comes ahead of U.S. central bank monetary policy meeting scheduled for Tuesday and Wednesday, which is expected to see Federal Reserve officials hike borrowing costs by 0.5%, which would be the biggest rate hike since 2000, with several more increases in the federal funds rate projected before the end of the year. The decision will be released 2 p.m. EST Wednesday, followed by a news conference from Fed Chairman Jerome Powell at 2:30 p.m. EST.

Nearly 100% of investors expect FOMC to raise interest rates by 50-baisis points on Wednesday, followed by similar increases in June and July, according to CME Fed WatchTool. Some analysts are forecasting FOMC could even announce a 0.75% increase this summer as it battles a record surge in inflation. Such a move, however, could lead to recessionary pressures in the U.S. economy that unexpectedly shrank 1.4% in the first three months of the year.

Faced with potential shock to the economy, some Fed officials publicly ruled out the likelihood of a supersized rate hike. Cleveland Federal Reserve President Loretta Mester on Friday (4/29) said she doesn't see the need for a "shock" 75 basis point increase, and that she expects a 0.5% increase at the next FOMC meeting, with more to follow.

The prospect of higher borrowing costs in the United States has been compounded by a sharp slowdown in China's economy, with lockdowns in the biggest cities including Shanghai slamming output and snarling supply chains. Manufacturing data released this weekend show economic activity in China's manufacturing sector slipped further in contraction last month, down to 47.4, the lowest reading since February 2020 when COVID-19 outbreak in Wuhan shuttered the national economy.

The government's refusal to abandon its zero-COVID policy and strict containment measures is fanning fears over looming recession in the world's second largest economy. Beijing has begun the process of school closures along with mandatory COVID-testing for 21 million residents. In Shanghai, a city of 25 million people, authorities continue to resort to extreme lockdown measures that prohibit residents from leaving even the space of their own apartments.

Today, analysts believe the lockdowns depressed China's oil consumption by at least 1.5 million barrels per day (bpd) or 20% during the March-April period.

Near 7:30 a.m. EST, NYMEX West Texas Intermediate futures for June delivery fell $3.73 to below $101 barrel (bbl), and the international crude benchmark July Brent contract declined $3.51 bbl to $103.63 bbl. NYMEX June RBOB slumped more than 9 cts to trade near $3.3541 gallon, and the front-month ULSD contact dropped 6.51 cts to $3.9568 gallon.

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