DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange reversed higher in afternoon trade Thursday, lifting the U.S. crude benchmark above $117 barrel (bbl) helped by a sharp drop in the U.S. Dollar Index after a number of European central banks raised interest rates Thursday in an attempt to control inflation that is forecast to climb higher as European Union sanctions on Russian oil and product exports come into full effect later this year.

Eurozone inflation in May hit its highest level since the creation of the euro currency in 1999, stoked by a record run-up in energy and food prices in the aftermath of Russia's invasion of Ukraine. Fueled initially by soaring energy prices, inflation has broadened out to key consumer items such as shelter and services with double-digit readings in parts of the continent. For comparison, consumer prices in Estonia surged 19% year-on-year in May, in Czech Republic by 14.2%, and Bulgaria by 14.4%. It's worth noting that these countries are highly dependent of Russian oil and gas imports.

Forecasts are not looking great either as energy prices across the 19-nation economic bloc are unlikely to moderate anytime soon amid unprecedented sanctions against Russian exports of oil and petroleum products. The EU embargo on Russian oil shipments is yet to come into full effect, doing so on Dec. 5, with a ban on petroleum product imports taking full effect on Feb. 5, 2023.

While addressing the question over how high oil can go this year, Russian Deputy Prime Minister Alexander Novak said he wouldn't rule out $150 bbl oil by the end of the year. Faced with these headwinds to the collective economy, the European Commission lowered its growth forecast to 2.7% this year from the 4% estimated this winter.

Hours after the U.S. Federal Reserve lifted interest rates by 75 basis points, the most in almost three decades, the Swiss National Bank and the National Bank of Hungary jacked up their lending rates by a higher-than-expected margin, sending shockwaves through the market. The Bank of Switzerland raised rates to -0.25% from -0.75%, while Bank of Hungary lifted its one-week deposit rate by 50 basis points to 7.25% also to tame stubbornly rising inflation now running in double digits.

In the physical market, Russian crude output is seen rising in July to pre-war levels, according to Novak.

"We see substantial growth in June as compared to May, of 600,000 b/d," he said on the sidelines of St Petersburg International Economic Forum. "Actually, we are very close to restoring the levels of February."

He noted, however, that Russia's crude exports will slip slightly this month as domestic refining activity rises.

Russia's oil dropped by almost 1 million barrels per day (bpd) in April as a result of reduced export demand since its invasion of Ukraine in February.

In financial markets, stocks on Wall Street slumped on 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. 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.

Chances of a "soft landing," when inflation falls without sparking a recession, has narrowed significantly after the 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.

At settlement, NYMEX July West Texas Intermediate futures advanced $2.28 to $117.59 bbl and ICE August Brent crude gained $1.30 to $119.81 bbl. NYMEX July RBOB futures rallied 6.16 cents to $3.9558 gallon and July ULSD futures added 2.43 cents to $4.5713 gallon.

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