DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange dropped more than 1.5% early Thursday, with all petroleum contracts extending declines from a brutal sell-off in equities the previous session that amplified investor worry over the risk of recession as the U.S. Federal Reserve moves to aggressively tighten monetary policy to combat high inflation.

June West Texas Intermediate eroded to a 1 1/2 week low $107.77 barrel (bbl) ahead of its expiration Friday afternoon, with the next-month contract trading with $3 discount. International crude benchmark for July delivery dropped $0.93 to $108.18 bbl. NYMEX RBOB June contact declined 12.31 cents to $3.5975 a gallon, while the front-month ULSD shed more than 9 cents to trade near $3.5715 a gallon.

Oil complex once again came under strong selling pressure from a weaker trend in equity markets amid broader recessionary fears. Stocks have also been jolted by a series of weak earnings reports from top U.S. retailers, including Target and Walmart, suggesting rising fuel and labor costs, as well as inventory builds, will pressure near-term profit margins. Each of the country's two largest retailers suffered their biggest single-day declines since 1987 this week, with Target losing around a quarter of its value in Wednesday's carnage.

The Federal Reserve, for its part, has said it won't deter from rate hike path until there is "clear and convincing" evidence that inflation is slowing, according to comments earlier this week from Chairman Jerome Powell.

Investors are still pricing in an 85% chance of a 50-basis-point hike next month, according to the CME Group's FedWatch tool, as well as an 84.7% chance of a similar move in July. Contacts tied to the Dow Jones Industrial Average indicate a 400-point decline for an opening bell Thursday while those linked the S&P 500 suggest a 1.6% drop.

Oil traders shrugged off the latest weekly data from the Energy Information Administration which revealed U.S. commercial crude oil inventories fell to their lowest since January 2005 and gasoline stocks eroded to a fresh year-low ahead of summer driving season, with demand for motor fuel topping 9 million barrels per day (bpd). However, refinery crude throughput climbed above the five-year average for the first time in a month as refiners processed over 15.9 million bpd -- its highest since early April -- which helped ease concerns over the crunch in gasoline and diesel supplies. U.S. commercial crude oil inventories fell 3.4 million bbl to 420.8 million bbl, and now stands about 14% below the five-year average. The large draw was bullish against market expectations for a 1 million bbl decrease and a 1.4 million bbl build reported by the American Petroleum Institute late Tuesday. Oil stored at the Cushing tank farm in Oklahoma, the delivery point for NYMEX WTI futures, decreased by 2.4 million bbl to 25.8 million bbl.

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