Oil Futures Mixed as Tight Supply counters Fed Rate Stance

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange moved mixed in early trade Monday, with both crude benchmarks edging higher on reports Russia is shutting its key natural gas pipeline to the European Union this week in a move that could further tighten the global oil market by incentivizing more gas-to-oil switching in the winter months. In contrast, RBOB and ULSD futures shifted lower in step with equity markets as Wall Street braced for another selloff today in the aftermath of Federal Reserve Chairman Jerome Powell's hawkish remarks on inflation.

In a keynote address in Jackson Hole, Wyoming, on Friday, Powell delivered a stern message that interest rates are going higher for longer even if it tips the U.S. economy into recession.

"We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done," said Powell in prepared remarks at the Fed's annual economic symposium.

Powell acknowledged that there will be pain for some American households and unemployment is likely to go higher as credit becomes more expensive, adding that "reducing inflation is likely to require a sustained period of below-trend growth."

The Fed chairman was clearly pushing back against a recent stock rally fueled by speculation central bank policymakers would soon reverse course from aggressive monetary tightening to avoid recession. Contracts tied to Dow Jones Industrials slid 250 points early Monday after collapsing by more than 1,000 points on Friday in the aftermath of Powell's speech, while S&P 500 and Nasdaq 100 futures dropped 0.92% and 1.3%, respectively.

There is a 70.5% probability the central bank will raise the federal funds rate by 75-basis points at their Sept. 20-21 Federal Open Market Committee meeting, according to CME's FedWatch Tool compared with a 29.5% expectation for a 50-basis point hike.

In the European Union, calls are growing louder for the European Central Bank to raise interest rates more aggressively at their meeting in September as inflation becomes more embedded into the economy. Latvian central bank chief, Martins Kazaks, said "the secondary effects of inflation" are becoming "more transparent and obvious," urging a "very strong, resolute and clear-cut" response.

European central bankers, however, have a different set of issues that are fueling inflation, including the upcoming closure of the Nord Stream 1 gas pipeline to Europe for three days of maintenance starting Wednesday (8/31). Markets are skeptical the pipeline will come back online in September in a view Moscow would hold back gas supply as an economic weapon for EU's support for Ukraine.

European natural gas prices surged to record highs on Friday, with Dutch TTF futures for October delivery surging to a high of 348.785 euros/MWh, an oil equivalent of around $600 bbl, while the November and December contracts both traded above 350 euros/MWh. Gas futures across European hubs eased slightly from the record highs on Monday after Germany said it had filled its gas storage ahead of the schedule as of late August.

U.S. investment Bank Morgan Stanley expects Northwest European gas storage to end the summer at 90% full, even if third quarter TTF prices return to their "expected" 170-190 euros/MWh range.

"Even taking these events into account, we believe gas prices have overshot fundamentals helped by poor market liquidity and that European gas markets can balance with TTF well below current levels."

Near 7:30 AM ET, West Texas Intermediate futures for October delivery advanced $0.29 to $93.33 bbl. International crude benchmark Brent futures edged higher to $101.08 bbl. NYMEX September RBOB futures declined 5.12 cents to $2.8001 gallon, while the September ULSD contract fell 6.66 cents to $3.9410 gallon.

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

Liubov Georges