DTN Oil

WASHINGTON (DTN) -- Following Friday's sell-off triggered by weak macroeconomic data in the United States and European Union, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange powered higher early Monday in step with rebounding equity markets as investors looked to a highly-anticipated Federal Reserve Open Market Committee meeting later this week that is expected to raise interest rates by another 75 baisis points to fight inflation.

The headline event this week will come Wednesday with the rate announcement from the Federal Open Market Committee following a two-day meeting by the Fed's governors.

Markets are widely anticipating the Fed will raise overnight lending rates by a sizable 75 basis points -- as the central bank did in June in the biggest rate hike in almost 30 years. More than 70% of investors now anticipate a 75 basis point rate hike, compared with just under 25% that bet on a larger full percentage increase, according to the CME Fed Watch Tool. There won't be new economic projections in this meeting so all focus will be on how the Fed guides the markets into the rate increases for September and later this year with economy showing first signs of significant deterioration.

U.S. gross domestic product estimated to have contracted to a negative 1.6% for the second quarter, according to Atlanta's Federal Reserve GDP Now model, which is down from a negative 1.5% seen a week ago. The downgrade follows a slew of weak macroeconomic data last week, including U.S. PMI surveys that showed economic output contracted in July for the first time in more than two years. Losses in business activity were led by services sector that unexpectedly fell below 50 this month -- a threshold that separates growth from contraction. Commenting on the data, Chris Williamson, chief business economist at S&P Global Market Intelligence, said: "The preliminary PMI data for July point to a worrying deterioration in the economy. Manufacturing has stalled and the service sector's rebound from the pandemic has gone into reverse, as the tailwind of pent-up demand has been overcome by the rising cost of living, higher interest rates and growing gloom about the economic outlook." On the flip side, a number of firms reporting weakening demand environment has helped to alleviate inflationary pressures. Average prices charged for goods and services rose at a much lower rate in July.

In Europaen Union, the surveys showed accelerating downturn in manufacturing activity that is pressured by rising fuel costs accompanied with a loss of pent-up demand.

The eurozone economy set to contract in the third quarter as business activity slipped into decline and forward-looking indicators suggest that worse is yet to come in the months ahead, read the report. On Thursday, the European Central Bank surprised the markets with a larger-than-expected rate hike of 50 basis points, with the rate hike the first in 11 years. "The Governing Council judged that it is appropriate to take a larger first step on its policy rate normalization path than signaled at its previous meeting," the ECB said in a statement Thursday.

This comes against the backdrop of a persistent threat from Russia that could turn off gas supplies into European Union -- a move that would most likely trigger a deep recession across economic bloc. Last week, European Commission proposed a plan to require all 27 member-states to cut natural gas use by 15% starting next month. Several EU member-stated pushed back against the proposal, suggesting voluntary targets instead of compulsory ones due to the varied level of each state's dependency on Russian gas as well as the amount they have managed to funnel into storage. The reduction should also be less if a member state has extra gas it could supply to others in the EU either via LNG shipments or pipelines. Certain industries seen as critical to the single market should also be exempt, according to the draft document.

"Member states should be free to choose the appropriate measures to reach the demand reduction." the draft read.

Near 7.30 a.m. EDT, NYMEX September WTI futures climbed above $95 barrel (bbl), up by more than $1 in overnight trade, while the front-month Brent contract advanced $1.08 to $104.28 bbl. NYMEX RBOB August futures gained 3.62 cents to $3.2590 gallon and August ULSD futures jumped 3.27 cents to $3.4883 gallon.

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