DTN Oil

WASHINGTON (DTN) -- Following equity markets lower, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell more than 3% Thursday as investors rapidly repriced the pace of interest rate hikes by the U.S. Federal Reserve and European Central Bank in the face of persistently high inflation, which is seen denting the global economy and fuel demand.

West Texas Intermediate and Brent wiped out nearly all the gains triggered by the Russian invasion of Ukraine on Feb. 24 when the oil contracts traded in a roughly $95 to $99 barrel (bbl) range. At the heart of the sell-off is the narrative of demand destruction that is quickly taking an upper hand against Russian oil sanctions and 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.

On Wednesday, Bureau of Labor Statistics released their consumer price index for June that showed inflation in the United States is becoming ever more entrenched in the economy, with prices increasing at the fastest clip in 41 years. More than 80% of investors now expect the Federal Open Market Committee will hike interest rates by a historic full percentage point when the board meets in two weeks, according to CME's FedWatch Tool. Futures markets priced in just a 7% chance for a 100-basis point interest rate hike before the June CPI release.

In Eurozone, money markets are also positioning for interest rate increases in September by ECB that has so far maintained its base rate into negative territory. The Bank of Canada shocked markets Wednesday by leading the way for other major central banks, raising its base rate by a 1%.

Not surprisingly, rapid repricing in the face of monetary tightening and the hotter-than-expected inflation report once again stoked fears about a looming recession in the United States and elsewhere. Economists at Bank of America now see a contraction in U.S. growth this year followed by a moderate recovery. In the fourth quarter, BOA see real GDP 1.4% below the year-earlier level. Data from Federal Reserve Bank of Atlanta last updated July 8 show second quarter GDP already fell into contraction, down a negative 1.2%.

Near 7:30 a.m. EDT, the U.S. dollar surged 0.74% against a basket of foreign currencies to a fresh 20-year high 108.6 to further pressure the front-month WTI contract that fell more than $3 to $93.24 bbl nearly five-month low on the spot continuous chart overnight. The international crude benchmark Brent contract for September declined $2.41 to $97.17 bbl. NYMEX August RBOB futures declined 10.68 cents to $3.1269 gallon, while front-month ULSD slid more than 6 cents to $3.5741 gallon.

Bearish inventory report released from the U.S. Energy Information Administration on Wednesday morning further weighed on the oil complex. The data showed gasoline demand in the U.S. dropped off sharply during the week ended July 8, eroding to a six-month low 8.1 million barrels per day (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