DTN Oil

WASHINGTON, D.C. (DTN) -- While the front month ULSD contract advanced for a fourth session, West Texas Intermediate and RBOB futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Friday's session with losses between 1% and 2.5% triggered by a sharp rebound in the U.S. dollar index and a resumption of Russian oil exports to several Central European countries after a problem over transit payments with Ukraine was resolved.

Slovakia's economy minister Richard Sulik said on Friday oil shipments through a critical pipeline that delivers Russian crude and refined products have resumed at about 50% of capacity, with additional volumes expected to come back online in coming days. Earlier this week, Russian state pipeline operator Transneft halted shipments through the southern branch of the Druzhba pipeline, which runs through Ukraine to the Czech Republic, Slovakia, and Hungary, citing European Union sanctions and issues with processing payment.

Slovakia, Hungary, and Czech Republic receive practically all their oil imports through the Druzhba pipeline. EU leaders agreed in May to embargo most Russian oil imports shipped by sea but allowed for Druzhba flows to landlocked countries in Central Europe.

Earlier this month, Russian state-owned energy giant Gazprom limited natural gas flow through the Nord Stream pipeline to just 20% of capacity, also citing issues with sanctions, delivering only 33 million cubic meters a day.

Protracted disruption to European energy supplies have already pushed several large EU economies to the brink of recession, with Germany reporting no growth in nominal gross domestic product for the second quarter. The economic slowdown is likely to intensify as winter approaches and energy prices rise further in Europe, with several countries on the continent vulnerable to Russia completely cutting off gas flow.

Underpinned by uncertainty over Russian supplies and elevated demand in the EU from scorching hot summer weather, spiking natural gas prices are prompting more gas-to-oil switching in power generation. This dynamic is underpinning support for ULSD futures. In its monthly oil market report, International Energy Agency revised higher its global oil demand projections for the remainder of the year, citing accelerated gas-to-oil switching for power generation in the EU, Middle East, and parts of Asia amid inadequate supplies and sky-high gas prices.

"With several regions experiencing blazing heatwaves, the latest data confirm increased oil burn in power generation, especially in Europe and the Middle East but also across Asia. Fuel switching is also taking place in European industry, including refining," said IEA.

On the macroeconomic front, U.S. inflation decelerated in July by more than expected, reflecting lower energy prices which may take some pressure off the Federal Reserve to continue aggressively hiking interest rates. The consumer price index increased 8.5% from a year earlier, cooling from the 9.1% June advance that was the largest in four decades, Bureau of Labor Statistics data showed Wednesday. Prices were unchanged from the prior month.

A decline in gasoline offset increases in food and shelter costs. So-called core CPI, which strips out the more volatile food and energy components, rose 0.3% from June and 5.9% from a year ago. The core and overall measures came in below forecast.

The better-than-expected inflation data reset investor expectations of how aggressive the Federal Reserve would have to raise interest rates at its Sept. 20-21 meeting. Federal Open Market Committee hiked rates by 75 basis points at two consecutive meetings in June and July but stressed that the size of additional increases would depend on incoming data. FOMC will see one more monthly CPI report before their September meeting.

The CME Group's FedWatch is pricing in a 61.5% chance of a 50-basis point rate hike in September compared with 58% probability before Wednesday's CPI report, which would take its target federal funds rate to between 3% and 3.25%. Most expectations point to a target range between 3.5% and 3.75% by the end of the year.

At settlement, nearby-month delivery WTI fell $2.25 to $92.09 bbl, and the ICE Brent contract for October delivery dropped $1.45 to $98.15 bbl. NYMEX September RBOB settled 2.55 cents lower at $3.0460 gallon, while the NYMEX September ULSD contract advanced 3.38 cents to $3.5178 gallon.

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