DTN Oil

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and the front-month Brent crude contract on the Intercontinental Exchange settled at fresh multiweek lows Wednesday, although pared deeper losses in afternoon trade following news the U.S. State Department slapped sanctions on Iran following a breakdown in discussions to return to the Joint Comprehensive Plan of Action agreement.

"We are imposing sanctions on Iranian petroleum and petrochemical producers, transporters, and front companies," tweeted U.S. State Secretary Antony Blinken this afternoon. "Absent a commitment from Iran to return to the JCPOA, an outcome we continue to pursue, we will keep using our authorities to target Iran's exports of energy products."

JCPOA discussions resumed last week following a three-month hiatus, ending with no breakthrough. Iran seemed uninterested in returning to the discussions being held in Europe between intermediaries because Tehran refuses to talk directly with the United States.

Several reports also emerged this afternoon that the Iranian Revolutionary Guard Corps arrested several foreigners for spying, including a United Kingdom senior envoy. They were detained for taking soil samples where the IRGC conducts missile exercises according to reports from Reuters and the Far News Agency.

The sanctions news prompted buying off session lows reached in morning trading following further evidence economic growth in the United States was slowing amid broadening inflation and indicators suggesting the U.S. economy tipped into recession last month.

As also seen last week in the country's manufacturing sector, U.S. services activity registered their 25th consecutive month of growth in June, but activity was the slowest since the pandemic lockdowns in the second quarter of 2020. Institute of Supply Management's 55.3% reading was down 0.6% from May but better than market expectations for a slowdown to 54.8%. The service sector in the United States is faring better than manufacturing, which registered a 3.1% decline in June to 53%, with 50% the demarcation point between growth and contraction.

Part of the issue with both sectors is that ongoing supply chain challenges have frustrated sales for a lack of product, which was a big factor in June as auto manufacturers had fewer vehicles than demand. General Motors, for instance, said it could not deliver 100,000 vehicles in the second quarter due to a lack of parts to complete their assembly.

"Logistical challenges, a restricted labor pool, material shortages, inflation, the coronavirus pandemic and the war in Ukraine continue to negatively impact the services sector," said Anthony Nieves, chair of the ISM Services Business Survey Committee.

Inflationary pressures slowed economic activity in June, with the Bureau of Economic Analysis recently reporting its Personal Consumption Expenditures Index grew at a paltry 0.2% in May, down from 1.2% in March, with the trend seen accelerating.

"Consumers are shifting purchases away from our discretionary products to essentials," a respondent in retail trade told ISM. "Inflation is definitely taking a bite from our sales, and mall traffic is far below the norm, potentially due to inflation, a need for more disposable income on essentials and less willingness to drive to malls."

The ISM report was released simultaneously with the U.S. Bureau of Labor Statistics Jobs Opening and Labor Turnover Survey, which showed 11.3 million job openings in May, down 427,000 from April, while above expectations for a decline to 11.25 million.

Following those reports, the U.S. dollar index rallied to a fresh 107.070 20-year high before settling the session at 106.898, up 0.5% on the session and 1.9% since Friday. Accelerating strength in the dollar is realized on expectations for further rate hikes for federal funds to gain control over inflation, and a weakening euro and yen. The Federal Open Market Committee lifted the federal funds rate 75-basis points to a 1.5% to 1.75% range in mid-June and are expected to again hike the rate by another 75 points when they meet July 26-27. June's rate hike was the largest during a single meeting in 28 years.

FOMC minutes for their June 14-15 meeting released this afternoon show central bank officials were contending with "conflicting signals recently regarding the pace of economic growth, making it challenging to determine the economy's underlying momentum."

Since the mid-June meeting, data has skewed downward, with the Atlanta Federal Reserve Bank's GDPNow tracker on July 1 showing a 2.1% contraction in U.S. second quarter gross domestic product.

"Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist," according to the FOMC minutes.

Slowing growth and higher interest rates make it more likely that the U.S. economy is heading for a hard landing.

"Most economists seriously underestimate the magnitude of the coming recession," wrote the economist Dr. Philip Verleger on Tuesday (7/5) in his "Notes at the Margin" commentary.

Diesel fuel closely correlates with economic activity in the United States, owing to its primary use in commercial and industrial sectors, with NYMEX August ULSD futures the loss leader in today's trading activity.

NYMEX August ULSD futures settled down 19.1cts at a fresh 13-week low settlement on the spot continuous chart at $3.4106 gallon. August RBOB futures fell 9.24cts to a $3.2366 gallon settlement. For crude oil, NYMEX August West Texas Intermediate futures settled down $0.97 at $98.53 bbl, paring a loss to a $95.10 13-week intraday low on the spot continuous chart. ICE August Brent futures settled $2.08 lower at $100.69 bbl, with the larger decline coinciding with news Equinor restarted production on the Norwegian continental shelf, as a strike was resolved after Norway's government "proposed a compulsory arbitration to resolve the labor dispute."

Brian L. Milne can be reached at brian.milne@dtn.com