DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Monday's session higher following reports Russian crude oil exports fell by more than 13% this month amid a tightening grip of Western sanctions that are set to come into full force by the end of the year, while risk-on sentiment in the financial markets lent additional support.

Russia's oil shipments have declined for five consecutive weeks, according to Bloomberg estimates, taking them down by 480,000 barrels per day (bpd) since mid-June. That's based on a four-week average that helps to provide a better picture of the trend than the observation of flows from one week to the next. Shipments to China and India are down by somewhere between 15% and almost 40% from their post-invasion peak. The final scale of the decline will depend on where almost 4 million barrels (bbl) of crude on tankers that are yet to show final destinations is discharged. Much may eventually go to Asia, say analysts.

Asian countries, dominated by China and India, are still taking more than half of all the crude shipped from Russia, up from about one-third before the invasion. Flows to Asia have accounted for between 55% and 56% of Russia's total seaborne exports since early June.

The headline event for oil and equity markets this week will come on Wednesday with the rate announcement from the Federal Open Market Committee following a two-day meeting. Markets are widely anticipating the Fed will raise the overnight lending rate 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 are betting on a larger full percentage increase, according to the CME FedWatch Tool.

On Thursday, the Bureau of Economic Analysis will release its advanced estimate for second quarter gross domestic product in the United States, with the market anticipating a tepid 0.5% expansion to have occurred during the three months ended in June following a 1.6% contraction for the first quarter. Market estimates range from a 1.1% decline to a 1.5% expansion for second quarter GDP, while Atlanta's Federal Reserve Bank's GDPNow indicator suggests the U.S. economy contracted by 1.6%. If the Fed bank's nowcast forecasting model is accurate, it would mean the U.S. economy was in recession during the first half of 2022, with a recession defined as two consecutive quarters with negative GDP.

Several economic indicators have highlighted slowing U.S. growth, although a strong labor market has offered a conflicting market signal. According to a transportation equipment manufacturer responding to the Dallas Federal Reserve Bank's Texas Manufacturing Outlook Survey released Monday, "Broad-based inflation, together with difficulties in recruiting while our customers' activity is strong, creates a puzzling and uncertain environment."

The Dallas Fed survey showed a slowing manufacturing sector in Texas in July, albeit still growing. Business conditions were seen worsening for a fifth consecutive month in July in the Lone Star state.

Preliminary U.S. Purchasing Manager's Index data for July released Friday "point to a worrying deterioration in the economy," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "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."

Worsening economic conditions do offer some respite in that they cool demand and, with it, inflationary pressure that could mean the Federal Reserve won't have to be as aggressive as some market analysts have suggested. To be sure, after this month's expected 75 point basis hike, FOMC are expected to agree to a 50 point basis hike in the federal funds rate at their meeting in September. Still, expectations have dialed down even higher rate hikes, which coincides with a weaker U.S. dollar. The U.S. Dollar Index settled down 0.25% at 106.355 after inside trade, holding above Friday's 105.99 three-week low.

At settlement, NYMEX September West Texas Intermediate futures were up $2 at $96.70 bbl, with ICE September Brent advancing $1.95 to $105.15 bbl. NYMEX August RBOB futures rallied 15.92 cents to $3.3820 gallon, and August ULSD futures registered a 6.1 cents gain to $3.5166 gallon.

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