DTN Oil

NEW YORK (DTN) -- After rallying earlier in the session on reports of a large drop in Libya's crude production, West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange declined in afternoon trade Tuesday. The drop came as investors positioned ahead of the release of weekly inventory data in the United States as well as the rate announcement from the U.S. Federal Open Market Committee that is now seen hiking the overnight federal funds rate by a rare 75-basis points at its Wednesday meeting in an attempt to control the hottest inflation in 40 years.

Investors are quickly reassessing the magnitude of inflation in the United States and the extreme lengths the central bank could go to remove excess cash from the system that was flooded with liquidity over the course of the two-year pandemic.

It's clear that inflation is not slowing but accelerating as we head into the summer months while the economy is rapidly cooling off. Federal Reserve of Atlanta estimates economic growth in the second quarter eased to just 0.9% -- a far cry from forecasts of above trend growth seen last year. Economists at J.P. Morgan and Goldman Sachs said in client notes this week that they now expect the Federal Reserve to raise its policy rate by 75 basis points on Wednesday guided by the "startling rise in longer-term inflation expectations" in the June 10 University of Michigan's consumer sentiment report. Those expectations were accompanied by the lowest consumer sentiment index at 50.2 on record, with the University of Michigan beginning the survey in 1961.

Some analysts on Wall Street are even raising the possibility that the Fed could go to extreme lengths on Wednesday, hiking the overnight funds rate by 100 basis points -- something that has not been done since the historic interest rates hikes evoked by then Fed Chairman Paul Volcker, who successfully crushed rampant inflation in the early 1980s.

In the physical crude market, Libya suffered a heavy blow to its oil production this week after a wave of violent protests shut-in nearly all of 1.2 million barrels per day (bpd) in oil output from the north African country. Libya's oil minister, Mohamed Oun, told Bloomberg on Monday that the country is currently pumping a little more than 100,000 bpd. This catastrophic loss of Libya's production follows the very recent failed attempt by Fathi Bashagha, who was appointed prime minister of the "alternative government" in the east of the country, to take political control in Tripoli. Bashagha and his militia were eventually driven out of the city by various factions fighting in the capitol. The failure to form a central government recognized across Libya means oil production will likely remain a major supply risk for a tight global oil market for some time.

In its Monthly Oil Market Report released Tuesday morning, economists with the Organization of the Petroleum Exporting Countries forecast a drop in Russian oil production by 250,000 bpd from an earlier assessment to 10.63 million bpd for 2022. This was the first acknowledgment by OPEC that Russia, a key ally in an OPEC+ production agreement forged in 2017, would see a contraction in output after ignoring the effect of sanctions by Western countries for President Vladimir Putin's invasion of Ukraine.

Russian officials forecast a drop in the country's production of 17% in the second half of the year, which would press output below 10 million bpd. Aside from revisions to Russian oil production, the cartel maintained expectations for demand growth this year, projecting consumption at 100.29 million bpd for 2022, returning to pre-pandemic output levels, but lowered its estimate of non-OPEC output to 65.74 million bpd, a drop of 230,000 bpd.

Tuesday afternoon, traders also positioned ahead of the release U.S. inventory data for the week ended June 10, with the American Petroleum Institute publishing its weekly data at 4:30 p.m. EDT, followed by the official report from the U.S. Energy Information Administration Wednesday morning.

U.S. crude oil stockpiles likely decreased by 1.4 million barrels (bbl) in the reviewed week after building 2 million bbl during the first week of June, while distillate stocks are seen to have risen by 800,000 bbl from the previous week. Refinery use likely rose by 0.4% from the previous week to 94.6% of capacity.

At settlement, July West Texas Intermediate futures dropped $2 to $118.93 per bbl and ICE August Brent futures were $1.10 lower at $121.17 per bbl. For oil products, July ULSD futures advanced 11.06 cents to $4.3940 per gallon, and July RBOB futures were down 4.15 cents to $3.9938 per gallon.

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

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