Oil Futures Advance Ahead of Fed Rate Call, Inventory Data

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 shifted higher in early trade Wednesday after an industry survey from the American Petroleum Institute showed domestic crude and refined fuels stocks decreased by a larger-than-expected margin during the week ended July 22, while overnight weakness in the U.S. Dollar Index ahead of the conclusion of Federal Open Market Committee meeting this afternoon lent additional support for the oil complex.

FOMC is expected to lift the federal funds rate by another 75 basis points this afternoon, the same hike introduced in June, but there is uncertainty about how aggressive the Federal Reserve needs to be in coming months to fight 40-year high inflation. The economy has slowed markedly this summer, albeit the labor market remains tight with job openings exceeding the number of hirings by a wide margin. In June, the 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.

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 it will mean the U.S. economy is in recession, defined by two consecutive quarters with negative growth.

Further evidence of economic slowdown could be found in U.S. consumer confidence data released on Tuesday that showed Americas feel increasingly unhappy about the outlook for the economy and personal finances. The confidence index fell for the third straight month in July, slipping by a larger-than-expected 2.7% to 95.7 compared with expectations for a 96.8 reading. The decline in confidence surprised some economists who thought falling gasoline prices that have declined from record highs in mid-June might spark some economic optimism.

International Monetary Fund on Tuesday downgraded growth projections for the United States by 1.4% this year to 2.3%, driven by reduced household purchasing power and tightening monetary policy. Globally, the Washington-based institute revised its outlook to 3.2% this year before slowing further to a 2.9% GDP in 2023.

"The world may soon be teetering on the edge of a recession," said Jeff Kearns, managing editor of the IMF blog.

Separately, API data showed U.S. commercial crude oil inventories declined 4 million barrels (bbl) last week compared with expectations for a 700,000 bbl draw. Gasoline stockpiles fell 1.1 million bbl from the previous week. Markets were expecting a smaller draw of 100,000 bbl. Distillate stocks also declined by 600,000 bbl in the reviewed week versus calls for a 200,000 bbl build. U.S. Energy Information Administration will release its weekly inventory report at 10:30 a.m. EDT.

Underlining gains in the oil complex are ongoing concerns about adequate gas supplies in the European Union after Russia's 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 was 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. Dutch Title Transfer Facility natural gas prices jumped to above 200 euros per megawatt/ hour -- a new record-high. That was more than 26% higher than Friday's (July 22) close and roughly 780% above a year earlier. 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.

Near 7:30 a.m. EDT, NYMEX September West Texas Intermediate futures climbed $1.16 to $96.14 bbl, with ICE September Brent rallying $1.05 to $105.45 bbl. NYMEX August RBOB futures jumped 4.40 cents to $3.3990 gallon, and August ULSD futures registered a 4.59 cents gain to $3.6298 gallon.

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

Liubov Georges