DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange eroded further in early morning trade Wednesday after the International Energy Agency (IEA) forecasted the global oil market is likely to rebalance in the second half of the year driven by slowing demand growth and accelerated gains in non-OPEC oil supplies that should partially offset the loss of Russian barrels.

Oil's move lower also comes ahead of perhaps the most consequential Federal Reserve rate decision in more than a decade set for 1 p.m. CDT, followed by a press-conference by the Fed's Chairman Jerome Powell 30 minutes later. Investors are quickly re-pricing a more aggressive increase to federal funds rates Wednesday and on July 27 as the central bank struggles to control the hottest inflation in over four decades.

Near 6:30 a.m. CDT, July West Texas Intermediate futures dropped $0.63 to $118.36 barrel (bbl) and ICE August Brent futures were $0.40 lower at $120.69 bbl. For oil products, July ULSD futures slipped 0.30 cents to $4.3928 gallon, and July RBOB futures declined by 3.68 cents to $3.9570 gallon. U.S. dollar retreated from a 20-year high 105.342 settlement on Tuesday, trading 0.64% lower against the basket of foreign currencies. U.S. equity futures edged higher in overnight trade, following on from a session which consolidated a bear market for the S&P 500.

In its monthly oil market outlook, IEA maintained its global demand projections this year at 99.4 million barrels per day (bpd), slightly below the pre-pandemic level of 99.7 million bpd. Within quarters, the agency boosted estimates for the thirst three months of the year to 99.3 million bpd, while shaving 400,000 bpd in the third and fourth quarters combined for the average growth of 100.1 million bpd.

"Higher oil prices and a weaker economic outlook continue to temper our oil demand growth expectations." said IEA.

Next year, however, a resurgent China is expected to boost non-OECD demand growth, offsetting a slowdown across industrialized countries. Global oil demand is forecasted to expand by 2.2 million bpd to 101.6 million bpd in 2023, which exceeds pre-pandemic levels. As demand rebounds, global oil production may struggle to keep pace with consumption next year, as tighter sanctions force Russia to shut in more wells and a number of producers bump up against capacity constraints. Non-OPEC+ producers, led by the U.S., will add 1.9 million bpd of supply in 2022 and 1.8 million bpd next year. Nevertheless, to keep the implied balance from tipping into deficit, OPEC+ would have to further tap into its dwindling capacity cushion, reducing it to historic lows of just 1.5 million bpd. Meanwhile, global oil inventories increased in April for the first time in two years, increasing by 77 million bbl, with preliminary data for May showing another build of 6 million bbl.

OECD industry stocks also rose, by 42.5 million bbl, translating into 1.42 million bpd increase, helped by government stock releases of nearly 1 million bpd. OECD industry stocks were nevertheless 290.3 million bbl below the 2017-2021 average.

In financial markets, 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 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.

Also on Wednesday, oil traders positioned ahead of the release of U.S. inventory data from the Energy Information Administration on tap for 9:30 a.m. CDT release. Preliminary data from the American Petroleum Institute reported commercial crude oil stocks gained 736,000 bbl last week versus calls for a draw of 1.4 million bbl. Stocks at the Cushing, Oklahoma, hub, the New York Mercantile Exchange delivery point for the West Texas Intermediate futures contract, dropped 1.067 million bbl.

The data show gasoline stocks dropped 2.159 million bbl through June 10 versus an expected increase of 100,000 bbl. Distillate inventories added 234,000 bbl, below calls for an 800,000 bbl build.

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