Oil Slides as Inflation Worry Clouds Macroeconomic Outlook

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- With equity futures in retreat and the U.S. Dollar Index strengthening, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell sharply early Wednesday, with the crude contracts down 4% as investors return their focus on concerns over inflation and expectations for continued tighter monetary policy in the United States ahead of Congressional testimony Wednesday morning from Federal Reserve Chairman Jerome Powell, who last week oversaw the largest interest rate hike since 1994.

Recession concerns are in the spotlight Wednesday, with equity futures and oil prices dropping sharply as investors await Powell's testimony, when the Fed chief is expected to undergo scrutiny over the central bank's plans to stabilize prices and the potential fallout from those efforts. On June 15, the Federal Open Market Committee raised interest rates by 75 basis points, the biggest rate hike in 28 years. The Fed's Thomas Barkin said Tuesday he expects even more aggressive moves by the central bank to come as it seeks to reduce inflation that climbed to a fresh 40-year high 8.6% in May.

"Inflation is high, broad-based and persistent," said Barkin during a conversation sponsored by the National Association for Business Economics.

Debate over the potential that the Fed's aggressive rate hikes will push the U.S. economy into recession intensified after the Federal Reserve Bank of Atlanta's GDPNow tracker last week showed no growth for the second quarter following a 1.5% contraction over the first three months of the year, and modeling by the New York Federal Reserve Bank pointed to an 80% probability for a "hard landing." The indicators coincide with a steady increase in weekly jobless claims, stalled consumer spending and a weakening housing market.

Near 7:30 a.m. EDT, the U.S. dollar advanced 0.08% to 104.285 in index trading, adding pressure to August West Texas Intermediate futures, which fell below $105 barrel (bbl), down more than $4. ICE August Brent futures declined $4.44 to $110.27 bbl. NYMEX July RBOB futures retreated 7.49 cents to $3.7196 gallon and NYMEX July ULSD futures fell to $4.3040 gallon, down more than 5 cents.

Oil futures registered higher settlements on Tuesday after AAA projected the strongest demand for road travel for the upcoming July 4th holiday on record at 42 million people despite retail gasoline prices averaging on either side of $5 gallon.

"Earlier this year, we started seeing the demand for travel increase and it's not tapering off. People are ready for a break and despite things costing more, they are finding ways to still take that much-needed vacation," said Paula Twidale, senior vice president of AAA Travel.

Garrett Golding, senior business economist in the research department at the Federal Reserve Bank of Dallas, sees the potential for even higher fuel prices.

"Though daily national average prices recently eclipsed $5 a gallon, there may be room for prices to rise much higher based on prior episodes, when consumers experienced, and to some extent withstood, such prices," he said in a paper released Tuesday.

Golding noted the price advances for oil products outpaced those for crude oil following refinery closures during the COVID-19 pandemic, with about 1.5 million barrels per day (bpd) of capacity now out of service. The scramble in supply chains earlier this year triggered by Russia's unprovoked invasion of Ukraine on Feb. 24 has further tightened the global oil-supply demand balance, with gasoline prices up 34% since December and diesel prices spiking 53% in 2022.

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

Liubov Georges