DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange advanced in early trade Friday, although all petroleum contracts are on track for a second straight weekly loss after Jerome Powell, chairman of the U.S. Federal Reserve, raised the possibility of a recession in the United States provoked by aggressive interest rate increases aimed at cooling inflation that is now running at the fastest pace in 40 years.

The U.S. Federal Reserve is choosing to go after inflation despite the risk of tilting the economy into a recession, with the increased probability for an economic contraction and lost demand pressing West Texas Intermediate crude futures to a six-week low and Brent crude to a five-week low this week.

During testimony before the U.S. Senate Banking Committee on Wednesday, Powell cautioned that lowering rapidly broadening inflation without tipping the U.S. economy into a painful downturn would be "very challenging," and that a recession is "certainly a possibility."

"We do understand the full scope of the problem, and we're using our tools to address it pretty vigorously now," Powell testified this week. "Price stability is really the bedrock of the economy."

U.S. consumer prices, a gauge of inflation, climbed to 8.6% in May, with prices for essential items such as food and fuel accelerating rapidly from the previous month. Consumer sentiment in the United States slumped to a record low 50.2 in early June, according to the University of Michigan's closely watched survey, with consumers abruptly lifting their short- and long-term inflation expectations. Nearly 46% of respondents attributed their negative views about the economy to persistent price pressures. Just 13% expect their incomes to rise more than inflation, the lowest share in almost a decade.

Investors will turn their focus to the final reading on U.S. consumer sentiment for June to be released later Friday morning that is expected to remain unchanged at the record low 50.2 reading. Should data come in weaker than expected or long-term consumer inflation expectations further de-anchor, this could trigger additional selling in the oil complex.

On a positive note, the Federal Reserve said late Thursday that all 33 of the nation's largest banks, banks with more than $100 billion in assets, passed the Fed's annual 'stress test' in an assessment that will allow them to boost shareholder returns even in the event of severe recession.

Separately, the U.S. Energy Information Administration was forced to delay its Weekly Petroleum Status Report until next week due to "systems issues," leaving traders to rely on the American Petroleum Institute for a weekly update on U.S. inventory levels. API data showed commercial crude oil inventories increased by a surprise 5.6 million barrels (bbl) during the week ended June 17 -- the third consecutive weekly build. Building inventory likely signals slowing fuel demand as high gasoline prices prompt consumers to drive less while a slowing economy tilting closer to recession saps demand for diesel fuel. API reported gasoline inventories in the United States increased 1.216 million bbl last week compared with calls for a draw of 800,000 bbl, while distillate inventories fell 1.656 million bbl, missing an expected 300,000 bbl week-on-week increase.

In the Eurozone, business activity across the manufacturing sector slowed markedly this month, with output contracting at the sharpest rate since the height of the global financial crisis in November 2008. Both the stagnation of demand and worsening outlook were widely blamed for the rising cost of living, tighter financial conditions and concerns over energy and supply chains that are linked to the war in Ukraine and ongoing pandemic disruptions.

Germany, European Union's largest economy, warned of a collapse in its energy markets Thursday amid a worsening natural gas shortage after Russia throttled its supply over the Ukraine war, with Germany lifting the emergency level to the "alarm" stage, the second highest in its plan. German Economy Minister Robert Habeck said on Thursday that the shortages can create a spillover effect for local utilities and customers, including businesses and consumers.

Near 7:30 a.m. EDT, NYMEX August WTI futures climbed $1.93 to $106.17 bbl and ICE Brent crude for August delivery advanced $1.89 to $111.94 bbl. NYMEX RBOB July contract gained 4.86 cents to $3.8142 gallon and NYMEX July ULSD futures was little changed near $4.3441 gallon.

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