DTN Oil

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Thursday's session lower, although all contracts moved off steep intrasession lows in step with recovering equity indexes after Federal Reserve Governor Christopher Waller suggested markets are overestimating the potential for a 1% increase in the federal funds rate at the next Federal Open Market Committee meeting later this month, easing concern the U.S. central bank would look to shock the market to rein in inflation.

Financial markets on Thursday continued to reprice the chances for a 100-basis point rate increase at the July 26-27 FOMC meeting, with CME's FedWatch Tool now showing most investors once again expect a 75-basis point rate increase. That compares with just 19.7% a day earlier.

The repricing follows comments from Waller who said he would not support raising interest rates by a full percentage point at this time but added that should retail sales and housing data come in stronger-than-expected, he would lean towards a larger rate increase. U.S. retail sales data for June is scheduled to be released Friday morning, with consensus calling for a 0.9% monthly gain after a 0.3% contraction in May.

The inflation rate for June in the United States surged 9.1% from a year ago, hitting a new 41-year high, with Americans paying more for nearly everything from food and gasoline to medical services and rents. Rent, in particular, tends to be stickier compared with other items, suggesting inflation is becoming more entrenched in the economy.

St. Louis Federal Reserve President Jim Bullard said on Thursday that although inflation has not yet peaked, he expects it to slow in 2023 -- and he does not support raising the policy interest rate by 100 basis points for now.

Following the comments from central bank officials, stocks on Wall Street pared earlier losses but were still mostly lower late afternoon, with the Dow Jones Industrial Average down nearly 150 points near the close after being off over 600 points earlier in the session.

U.S. dollar once again rallied in index trade against a basket of foreign currencies, climbing to a new 20-year high at 109.140 before settling at 108.407 on the back of renewed weakness in the euro. Italian Prime Minister Mario Draghi offered his resignation on Thursday after populist coalition partner Five Star withdrew its support in a confidence vote, with Draghi issuing a statement that the pact of trust that had sustained the united government was gone. Italian President Sergio Mattarella rejected Draghi's resignation. The former head of the European Central Bank has led the Italian government since February 2021.

NYMEX West Texas Intermediate August contract settled the session $0.52 lower at $95.78 bbl after plunging to a $90.56 bbl five-month low on the spot continuous chart, while international benchmark Brent for September delivery declined $0.47 for a $99.10 bbl settlement. NYMEX August RBOB futures declined 4.69cts to $3.1868 gallon, while front-month ULSD slid 1.65cts to $3.6494 gallon.

At the heart of the selloff is the narrative of demand destruction amid slowing economic growth and possible recession that is quickly taking an upper hand against Russian oil sanctions and the perception of a tight physical oil market.

This week, International Energy Agency warned that high fuel prices have started to dent oil consumption in Europe and North America even as demand rebounds in China to partially offset those losses. Although the agency revised its demand forecasts down only marginally, markets clearly anticipate deeper demand losses in coming months as central banks around the world take up arms in their fight against inflation.

A bearish inventory report from the U.S. Energy Information Administration released Wednesday morning offered additional evidence of demand destruction. The data showed gasoline demand in the United States dropped off sharply during the week-ended July 8, eroding to a six-month low 8.1 million bpd, while diesel consumption fell to the lowest level this year at 3.368 million bpd. As a result, distillate stocks climbed 2.7 million bbl to 113.8 million bbl, although are still below the five-year average, now at 18%. Gasoline stockpiles jumped 5.8 million bbl from the previous week to 224.9 million bbl, and U.S. commercial crude oil inventories rose 3.3 million bbl to 427.1 million bbl, narrowing a deficit against the five-year average to 5%.

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