Oil, Equities Slump as Investors Mull Effect of Rate Hike

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- With U.S. equity markets in retreat, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange continued lower in early trade Thursday as investors reset expectations for a near-term recession in the United States after Federal Open Market Committee hiked interest rates by 75-basis points on Wednesday -- the largest single meeting increase in the federal funds rate since 1994, in an attempt to control a relentless rise in consumer prices.

Chances of a "soft landing," when inflation falls without sparking a recession, have narrowed significantly after Federal Reserve stepped up its fight against heightening inflation this week. Fed officials also markedly cut their outlook for 2022 economic growth, now anticipating a 1.7% expansion in U.S. gross domestic product compared with its 2.8% outlook in March. That outlook might be too rosy, with Atlanta's Federal Reserve Bank's GDPNow tracker now showing expectations for no growth in the second quarter, down from 0.9% expected growth on June 8, while following a 1.5% contraction for the first quarter.

The Fed's decision comes in response to the hottest inflation in 40 years, with May's Consumer Price Index showing a year-on-year increase of 8.6%, rising sharply since Joe Biden assumed the presidency.

"Recent events raised the degree of difficulty to get a 'softish landing.' We just don't know if we can achieve it," said Fed Chairman Jerome Powell in a news conference Wednesday afternoon after the rate announcement.

International Energy Agency on Wednesday forecast a more balanced oil market in the second half of the year, dialing down expectations for a tight disposition as analysts with the Paris-based agency project flagging demand across countries that are part of the Organization for Economic Cooperation and Development bloc under pressure from high energy prices and tightening monetary policy. 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 producers elsewhere 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, projects IEA. 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 on Wednesday reported 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.

In early trading, NYMEX July West Texas Intermediate futures fell $2.05 to near $113.25 bbl, and ICE August Brent crude declined $2.15 to near $116.35 bbl. NYMEX July RBOB futures dropped 6.35 cents to near $3.8315 gallon, and July ULSD futures dropped 12 cents to near $4.4270 gallon.

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

Liubov Georges