DTN Oil

WASHINGTON (DTN) -- Reversing overnight gains, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange softened in early trade Friday, with all petroleum contracts on track for the first weekly losses in nearly two months, driven by fears over potential recession in the United States after the Federal Reserve lifted the federal funds rate by the single largest increase since 1994.

Two narratives dominated the oil market this week -- an aggressive interest rate hike cycle by the Federal Reserve followed by similar moves by some European central banks and emerging signs of demand destruction helped by sky-high inflation across much of the Organization for Economic Cooperation and Development bloc.

Central banks in the European Union, United Kingdom and United States are actively targeting energy-driven inflation, so the market is laser-focused on the consumer reaction to the prospect of more rate hikes.

U.S. retail data for May showed the first drop in consumer spending in five months as purchases of autos and electronics plunged, suggesting aggregate demand is finally moderating. As price pressures become more entrenched in the economy, spending will likely ebb as they outpace earnings, with higher prices compounded by climbing interest rates. This trend doesn't bode well for gasoline consumption in the United States, with the latest Energy Information Administration data showing implied gasoline demand declining to 9.093 million barrels per day (bpd), about 267,000 bpd or 2% below the 2021 demand level. Widening demand destruction, which is occurring in less wealthy economies now, could weigh on oil prices.

In Europe, several central banks raised interest rates this week by a larger-than-expected margin to control a record run in consumer prices, with some member-states recording double-digit inflation. Consumer prices in Estonia surged 19% year-on-year in May, by 14.2% in Czech Republic, and in Bulgaria by 14.4%. It's worth noting that these countries are highly dependent on Russian oil and gas imports. For the 19-nation bloc, inflation in May hit its highest level since the creation of the euro currency in 1999, initially fueled by soaring energy prices, inflation has broadened out to key consumer items such as shelter and services.

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. 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 this week said he would not rule out $150 bbl oil by the end of the year. Faced with these headwinds to the collective economy, European Commission lowered its growth forecast to 2.7% this year from the 4% estimated this winter.

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 bpd," 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 would slip slightly this month as domestic refining activity rises. Russia's oil dropped by almost 1 million bpd in April as a result of reduced export demand since its invasion of Ukraine in February.

Near 7:30 a.m. EDT, NYMEX July West Texas Intermediate futures traded little changed near $117.40 barrel (bbl) and ICE August Brent crude was flat near $119.80 bbl. NYMEX July RBOB futures fell 6.99 cents to $3.8859 gallon and July ULSD futures eased 0.86 cents to $4.5627 gallon.

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