DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange moved sharply lower early Monday as what has been called an "explosive" and "ferocious" COVID-19 outbreak in Beijing led to concern of a return to lockdowns amid China's zero-COVID policy while the U.S. dollar continued Friday's rally spurred by expectations for aggressive interest rate hikes amid accelerating inflation.

Beijing officials announced more than 100 new cases of COVID-19 in China's capital of 22 million, linking the outbreak to the Heaven Supermarket Bar, according to Reuters, that has led to mass testing and the potential for a return to lockdowns less than two weeks after the country eased restrictions on June 1. A return to mass lockdowns, which China deployed in Beijing and Shanghai -- China's largest city of 26 million -- for about two months beginning in April, would again hobble mobility and slow economic activity by the world's largest oil importer.

In a Wall Street Journal opinion article in May, Keven Rudd, former Australian Prime Minister and global president of the Asia Society, said in late April through May roughly 373 million people in 45 cities were under some type of lockdown amid Chinese President Xi Jinping's zero-COVID policy. Rudd said those cities represented about 40% of China's total economic output, or roughly $7.2 trillion in annual gross domestic product.

Climbing inflation in the United States, which unexpectedly accelerated in May to a 40-year high 8.6% on an annual basis, has spurred a rally in the U.S. Dollar Index ahead of this week's Federal Open Market Committee's two-day meeting on expectations central bank officials would need to tighten monetary policy more aggressively. The Federal Reserve previously signaled 50-basis point increases in the federal funds rate for both June and July, but Friday's consumer price index reading at a high last seen in 1982 has the market anticipating a 75-basis point hike in the key benchmark interest rate for July.

CME Group's FedWatch Tool shows 75.1% of market followers still expect a 50-basis point increase in the federal funds rate to be announced on Wednesday (June 15), which was lifted to a 0.75% to 1% target range by FOMC in early May, with 24.9% anticipating a 75-basis point increase. For the FOMC's July 27 meeting however, 53.8% of market followers expect a 75-basis point hike and 31.9% see the Fed maintaining previous guidance with a 50-basis point increase.

The market anticipates the Federal Reserve will increase the federal funds rate in each of its remaining five meetings for 2022 that heightens the risk for recession. CME Group's FedWatch Tool shows 40.5% of market followers expect the federal funds rate to reach a 3% by 3.25% target range by early November ahead of midterm elections and 29.5% see the key interest rate in a 3.5% by 3.75% target range by year's end.

Increases in both food and energy prices were, along with costs for shelter, components in pushing CPI up 1% in May from April, and those prices continued to advance in June. AAA reported the national average retail price for regular grade gasoline reached $5 gallon for the first time on record Saturday.

Near 7:45 a.m. EDT, July West Texas Intermediate futures were down $2 at $118.67 barrel (bbl), while the U.S. Dollar Index was up 0.58% at 104.760 following Friday's 0.9% surge, nearing May's 105.065 20-year high. ICE August Brent futures were down $1.75 at $120.26 bbl. For oil products, July ULSD futures were down 3.74 cents at $4.3293 gallon, and July RBOB futures were 9.32 cents lower at $4.0790 after losing 10.4 cents in Friday's session.

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