DTN Oil

WASHINGTON (DTN) -- Except for the ULSD contract, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell sharply on Wednesday after the Federal Open Market Committee delivered the biggest interest rate hike in 28 years in an attempt to regain control over soaring consumer prices while narrowing the chance for a "soft landing," when inflation falls amid monetary tightening without triggering an economic recession.

Fed officials projected on Wednesday the economy would grow just 1.7% this year, down from 2.8% expansion the central bank expected three months ago. What's more, growth projections were revised below the long-term trend of 2% through 2024, which clearly signals the economy might not escape the trap of inflation without significantly reducing economic output.

The Federal Reserve signaled the urgency of fighting inflation on Wednesday by announcing a rare 75-basis point rate hike -- the biggest single increase since 1994. But even with the Fed escalating its fight against soaring prices, inflation is projected to stay above 5% this year before moderating to 2.6% in 2023 and 2.2% the following year, according to the central bank's economic projections. At a news conference following the decision, Fed Chairman Jerome Powell said Wednesday's move was "an unusually large one," but added that either a 50-basis point or 75-basis point increase would be appropriate at the Fed's July 27th meeting.

"Recent events raised the degree of difficulty to get a "softish landing." We just don't know if we can achieve it," said Powell.

Also on Wednesday, International Energy Agency revised lower its demand projections for the third and fourth quarters this year by a combined 400,000 bpd, citing renewed weakness in economic growth in countries that are part of the Organization for Economic Cooperation and Development bloc.

"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 demand growth by countries outside the OECD, offsetting a slowdown across industrialized countries.

Global oil demand is forecast to expand by 2.2 million barrels per day (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 United States, will add 1.9 million bpd of output in 2022 and 1.8 million bpd next year. Nonetheless, to keep the implied balance from tipping into deficit, OPEC+ would need to further tap into its dwindling spare 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 barrels (bbl), with preliminary data for May showing another build of 6 million bbl.

Further weighing on the oil complex, U.S. Energy Information Administration reported on Wednesday commercial crude oil inventories increased by 2 million bbl for the week-ended June 10, while domestic production climbed to 12 million bpd -- the highest output rate since the beginning of the pandemic in April 2020. Refinery throughputs averaged 16.3 million bpd during in the reviewed week, which was 67,000 bpd less than the previous week's average. Refineries operated at 93.7% of their operable capacity last week.

Gasoline production decreased to 10 million bpd. Distillate fuel production also decreased last week, averaging 4.9 million bpd. Meanwhile, demand for gasoline decreased 106,000 bpd to 9.093 million bpd after surging to its highest weekly rate this year. Demand for distillate fuels edged lower to 3.619 million bpd, down by 31,000 bpd from the previous week. Gasoline inventories dropped 710,000 bbl to 217.5 million bbl and are about 10% below the five-year average. Earlier this week, analysts expected inventories to have increased by 100,000 bbl from the previous week. Distillate stocks rose 725,000 bbl to 109.7 million bbl, still some 23% below the five-year average.

At settlement, NYMEX West Texas Intermediate July futures fell $3.62 to $115.31 bbl after sliding to a $114.60 two-week low, and international benchmark Brent crude declined $2.66 to $118.51 bbl. NYMEX July RBOB futures dropped 9.96 cents or 2.7% to $3.8942 gallon, with front-month ULSD futures rallying 15.3 cents to $4.5470 gallon.

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