WTI Slides as Fed Signals Larger Rate Hike in September

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -- While the RBOB contract settled the session higher, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange accelerated losses in afternoon trade Thursday, sending the U.S. crude benchmark towards $92 bbl in reaction to hawkish comments from several Federal Reserve officials suggesting a 75-basis point rate increase is more likely at Sept. 21-22nd meeting as part of the Fed's campaign to lower inflation.

U.S. central bankers were direct in their message at the Jackson Hole economic symposium that the Federal Reserve must raise interest rates until there is clear evidence that inflation is easing.

"It's very important that we are clear in our communication about the destination we are headed...We have to get interest rates higher to slow down demand and bring inflation back to our target," said Kansas City Fed President Esther George Michael in an interview with Bloomberg Television.

The same sentiment was echoed in comments from St. Louis Fed President James Bullard who noted that the current federal funds rate of 2.33% is not high enough to slow the economy.

Fed officials hiked rates by 75 basis points at each of their last two meetings and have said the same increase could be warranted again when they gather next month, provided the data is supporting the case for the increase. Markets will get a fresh reading on the consumer price index and employment next week that could determine the direction of Fed's monetary policy.

Since mid-July, a series of grim readings for the manufacturing sector, surging U.S. dollar and signs of retreating consumers may have blunted domestic growth enough for Chairman Jerome Powell to change his tone at this week's economic symposium in Wyoming. About one in six American households fell behind on their utility bills, according to National Energy Assistance Directors Association.

Meanwhile, the U.S. Bureau of Economic Analysis this morning revised higher its estimate for the second quarter gross domestic product growth by 0.3% to a negative 0.6%. The revision follows a 1.6% drop in real GDP figures for the first quarter, meaning the U.S. economy still entered a technical recession in the first half of the year. While two consecutive quarters of negative growth is considered a technical recession, it's not officially declared until the non-partisan organization National Bureau of Economic Research determines if the economy was in recession. Following the data's release, CME Fed's WatchTool showed that 64% of investors now bet the central bank would hike rates by 75 basis points in September compared with 41% a week ago.

Thursday's move lower also follows the inventory report from the Energy Information Administration showing gasoline consumption in the United States fell by 914,000 bpd from the previous week to 8.434 million bpd, bringing the four-week average to just 8.9 million bpd -- a full 7% below last year's level. The incoming data poured cold water on expectations that falling prices at the gas pump might incentivize some Americans to take one more road trip before summer ends. The American Automobile Association found that almost two-thirds of U.S. adults have changed their driving habits or lifestyle since March, with the top two changes used to offset high gas prices are driving less and combining errands.

At settlement, West Texas Intermediate futures for October delivery fell $2.37 to $92.52 bbl. International crude benchmark Brent futures fell below $100 bbl, down $1.83 from the previous session. NYMEX September RBOB futures advanced 1.14 cents to $2.8121 gallon, while the September ULSD contract eroded 6.41 cents to $3.9491 gallon, declining after several consecutive session gains.

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

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

Liubov Georges