Oil, Equities Gain as Hawkish Fed Ramps Up Inflation Fight

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Wednesday's session higher after the U.S. Federal Open Market Committee announced another 75 basis point hike in the federal funds rate, ramping up efforts to bring down inflation from a four-decade high despite growing signs of an economic slowdown, while a larger-than-expected drawdown in U.S. petroleum inventory for the week ended July 22 engendered a bullish sentiment.

The combined drawdown for commercial crude oil, gasoline and distillate fuel inventories was 8.6 million barrels (bbl) during the third week of July, coinciding with another steep decline from the Strategic Petroleum Reserve, down 5.6 million bbl, with combined exports of crude and oil products at 10.868 million barrels per day (bpd). Crude oil exports surged nearly 800,000 bpd to its highest weekly rate on record at 4.548 million bbl, signaling strong demand for U.S. crude amid international sanctions on Russian, Iranian and Venezuelan oil.

Commercial crude stocks fell by a sizable 4.5 million bbl even as refiners unexpectedly reduced run rates to 92.2%, Energy Information Administration data show. Markets expected refiners to have increased runs to above 94% of capacity. What's more, domestic oil production ramped up to its highest weekly rate since the beginning of the pandemic at 12.1 million bpd, up 200,000 bpd from the previous week.

In the gasoline complex, demand for motor fuel rebounded 8.5% from the previous week to 9.2 million bpd -- the second highest weekly rate this year, easing some concern over demand destruction. Gasoline stockpiles also fell by a larger-than-expected 3.3 million bbl to 225.1 million bbl last week and are now about 4% below the five-year average.

The headline event Wednesday was the decision by the Federal Reserve to raise interest rates by another 75 basis points, in line with market expectations, with the central bank having now lifted the federal funds rate 1.5% over the past six weeks to a 2.25% by 2.5% target range.

While addressing the likelihood of another large rate hike, Fed Chairman Jerome Powell responded that the central bank would remain dependent on the data, adding that he doesn't believe the U.S. economy is in recession.

"Too many sectors of the economy are doing extraordinary well," said the Fed chief.

The current outlook for the U.S. economy remains complicated, with the labor market extraordinarily tight with job openings exceeding the number of hirings by a wide margin. In June, U.S. economy added 372,000 new jobs and the national unemployment rate held near a five-decade low. That is particularly puzzling given the negative economic growth seen over the first quarter followed by what is likely to be a soft expansion in the second quarter. Fed's Powell said during his news conference that while data shows initial jobless claims have increased, the greater number of filings could be due to seasonal adjustment issues.

U.S. Bureau of Economic Analysis will release the first estimate for second quarter U.S. gross domestic product on Thursday, with median consensus calling for a 0.5% expansion. Should GDP data miss the mark with a negative reading this will mean the U.S. economy is in recession, defined by two consecutive quarters with negative growth.

In Europe, persistent concerns over the shipments of Russian gas continue to support natural gas prices after Gazprom cut its gas shipments on the key Nord Stream 1 pipeline to just 20% of the total capacity. According to a statement from Italian ENI S.p.A., actual gas deliveries from Gazprom fell to 27 million cubic meters on Wednesday, down from the 33 million cubic meters that were expected. It is now increasingly likely the European Union will face an intense gas shortage this winter that could lead to gas rationing, according to analysts. If Nord Stream 1 gas flows are cut off completely, and if winter is colder than usual, Europe's gas storage may run out by the end of February, according to energy consultant Wood Mackenzie Ltd.

At settlement, NYMEX September West Texas Intermediate futures climbed $2.28 to $97.26 bbl, with ICE September Brent rallying $2.22 to $106.62 bbl. NYMEX August RBOB futures jumped 7.38 cents to $3.4288 gallon, and August ULSD futures registered a 13.34 cents gain to $3.7173 gallon.

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

Liubov Georges