DTN Oil

WASHINGTON (DTN) -- The October ULSD contract on the New York Mercantile Exchange was again an outlier Thursday, declining 1.3%, while West Texas Intermediate and RBOB futures and Brent crude traded on the Intercontinental Exchange settled the session with solid gains. The moves came as investors weighed demand implications from the European Central Bank's decision to raise interest rates by a historic 75 basis points in an effort to stamp out inflation.

ECB announced on Thursday its largest interest rate increase since the creation of the European currency union in 1992, citing the debilitating effects of rising costs for energy and consumer goods. Inflation across the eurozone area has risen to 9.1% in August and is projected to top 10% in the coming months. At a news conference following the rate hike announcement, ECB President Christine Lagarde warned the ECB was ready to increase rates aggressively over the next several meetings should inflation continue to rise.

"We want all economic actors to understand that the ECB is serious" about combating high inflation, said Lagarde.

In economic projections released alongside the rate announcement, ECB forecasts inflation would climb to 8.1% this year before cooling to 5.5% in 2023 and coming close to the central bank's target of 2% in 2024.

Cooling inflation should bode well for fuel demand if the central bank avoids tipping the economy into recession as it fights higher prices with jumbo rate hikes. According to the base case scenario, ECB expects economic growth to slow to 0.9% next year, narrowly missing recession before recovering to 1.9% in 2024. In the downside scenario where Russia cuts off all natural gas supplies to Europe, the collective economy is seen contracting by 0.9% in 2024 with wide-ranging implications for energy demand.

The same sentiment was echoed in comments by U.S. Federal Reserve Chairman Jerome Powell Thursday during a Q&A session at the CATO Institute, where he reiterated that the central bank would do whatever it takes to fight inflation. He also signaled that a pause in rate hikes or a pivot to cutting interest rates is not coming soon.

"History cautions strongly against prematurely loosening policy," he said. "I can assure you that my colleagues and I are strongly committed to this project, and we will keep at it until the job is done."

Following Powell's remarks, the U.S. dollar lost some ground to finish the session at 109.713, down 0.11% against a basket of foreign currencies as investors repriced the likelihood of another jumbo 75-basis-point increase at the Federal Open Market Committee's meeting later this month. The CME Group's FedWatch tool shows investors are pricing in an 86% chance of a 75-basis-point hike in the federal funds rate to be agreed to at the Sept. 20-21 meeting compared with just 14% of a 50-basis-point increase.

Thursday's higher settlements came despite a mostly bearish inventory report released late morning by the Energy Information Administration showing domestic crude, gasoline and distillate inventories increased last week while refiners sharply reduced run rates.

The combination of a sizable drop in refining activity, jump in oil imports, and a 7.5 million-barrel (bbl) release from the Strategic Petroleum Reserves resulted in an outsized 8.3 million-bbl build in commercial crude inventories.

Gasoline demand in the U.S. improved slightly in the reviewed week, but at 8.727 million barrels per day (bpd), the consumption rate remained well below last year's level. Total products supplied to the U.S. market over the last four weeks averaged 20.1 million bpd, down 6.4% from the same period last year. Over the past four weeks, motor gasoline supplied averaged 8.8 million bpd, down 7.9% from the same period last year. Distillate fuel supplied to the U.S. market averaged 3.8 million bpd over the past four weeks, down 9.1% from the same timeframe last year.

At settlement, NYMEX October WTI futures rallied $1.60 to $83.54 per bbl, while Brent for November delivery advanced $1.15 to $89.15 per bbl. NYMEX October RBOB futures gained 3.84 cents to $2.3461 per gallon, and NYMEX October ULSD futures declined 4.59 cents to $3.5401 per gallon.

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