DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Tuesday's session with sharp losses triggered by growing concerns over derailed demand growth this summer amid signs of a sharp economic slowdown in the United States and elsewhere as central banks around the world move to tighten pandemic-era policies of quantitative easing.

Tuesday's move lower in the oil complex comes as investors navigate a cocktail of geopolitical and macroeconomic risks tied to rising inflation in the United States, COVID-19 lockdowns in China, and war in Ukraine with potential spillover into Eastern Europe.

Domestically, soaring inflation prompted U.S. Federal Reserve to raise the federal funds rate by a rare 50 basis points last month -- the single largest hike in interest rates by the central bank in 22 years. Speculation is growing the central bank will have to raise interest rates even more aggressively to tackle the inflationary pressure.

On Monday, Federal Reserve Bank of Atlanta President Rafael Bostic suggested two or three more 50 basis point rate hikes are needed this year, a view shared by Cleveland Federal Reserve President Loretta Mester who backs even larger rate hikes should inflation not cool off in the second half of the year.

"We don't rule out 75 forever. We're going to have to assess whether inflation is actually moving down, and then we'll be able to get more information after we do a couple of those to see," she said, referring to 50 basis point hikes.

Investors now await the release of U.S. Consumer Price Index for April scheduled for 8:30 a.m. EDT Wednesday, with consensus calling for consumer prices to have risen a modest 0.2% on the month in April versus March's 1.2% month-on-month increase, which was the largest monthly advance in 42 years. Year-over-year, CPI is expected to have slowed to an increase of 8.1% versus March's 8.5% annual gain, the largest yearly advance in 41 years. Should inflation data miss expectations, it could prompt the Federal Reserve to raise interest rates more aggressively and earlier than previously thought, which would surely trigger another selloff in equities.

In China, the economy has taken a hard hit from government-mandated lockdowns slapped on the country's major cities of Beijing and Shanghai. Chinese car sales plummeted 35.7% last month -- the biggest decline in over two years -- while use of public transport declined 22% from a week earlier across 11 large cities in the clearest sign yet of deteriorating mobility. Further evidence of economic turmoil can be found in China's home sales data that collapsed by more than 50% compared to a year earlier, according to government data released this week.

Moving forward, China's Communist Party shows no signs of abandoning their brutal tactics of combating COVID-19 resurgence that is clearly taking the country backwards. According to various estimates, demand for gasoline, diesel and aviation fuel in China slid 20% last month, accounting for a 1.4 million barrel (bbl) decline in daily consumption. It marked the largest hit to demand since the lockdown of Wuhan -- the epicenter of COVID-19 pandemic more than two years ago.

Faced with flagging demand in China, Saudi Aramco, the world largest oil producer, slashed its official selling prices for Asian buyers between $4.95 bbl and $5.10 bbl from all-time highs set for May deliveries.

Separately, U.S. crude oil stockpiles are expected to have decreased by 300,000 bbl from the previous week in data due out Tuesday afternoon from the American Petroleum Institute.

Gasoline stockpiles are seen to have fallen by 1.7 million bbl from the previous week, while distillate inventories likely fell 1 million bbl. Refinery use likely rose by 0.5% from the previous week to 88.9% of capacity.

On the session, NYMEX June West Texas Intermediate dropped $3.33 to settle at $99.76 bbl, and Brent crude fell below $103 bbl, down $3.48 to $102.46 bbl. NYMEX June RBOB futures declined 10.04 cents to $3.5415 gallon, and the front-month ULSD contract advanced 9.73 cents to settle at $3.9322 gallon.

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