Oil Wobbles Ahead of FOMC's Call on Rates, WTI Oct. Expiry

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 moved mixed in early trade Tuesday, with both U.S. and international crude benchmarks softening ahead of monetary policy meetings by the U.S. Federal Reserve and Bank of England that could lead to aggressive rate hikes to sap liquidity and risk-on sentiment from the financial markets.

The Federal Open Market Committee is expected to approve its third consecutive interest-rate increase of 0.75% on Wednesday, while signaling that interest rates will go higher for longer to bring inflation under control. Investors see a small chance of an even larger rate hike of a full percentage point at the Fed's policy meeting that begins Tuesday.

A few analysts have suggested the August inflation report showing relentless rise in core consumer prices could trigger a debate over the larger rate move. But others think surprising the public with a larger rate hike could fuel questions over growing risks that the central bank would tip the economy into recession.

On Tuesday, investors in interest-rate futures markets saw an 82% probability of a 0.75% rate rise and an 18% probability of a full-point increase, according to CME Group.

In Europe, money markets are rapidly dialing up calls for the Bank of England to deliver two outsized rate increases by the end of the year, with traders placing around a 60% chance of a 0.75% increase on Thursday. That would be the bank's largest increase since 1989, when it jacked up borrowing.

The U.S. Dollar Index, which has an inverse relationship with West Texas Intermediate, strengthened against a basket of foreign currencies to trade near 109.565. Earlier this month, the dollar index spiked to a 110.785 more than 20-year high amid rising bets that the Federal Reserve will have to hike interest rates aggressively this week, and at their two remaining meetings in 2022 to draw down excess liquidity from the market.

WTI for October delivery traded little changed near $85.80 barrel (bbl) ahead of its expiration this afternoon, and next-month November WTI traded at a $0.45 discount. International crude benchmark Brent for November delivery registered little changed near $92. NYMEX ULSD October futures advanced 4.03 cents to trade near $3.3511 gallon, and the front-month RBOB contract gained 2.47 cents to $2.4897 gallon.

Tuesday's mixed move in the oil market follows industry surveys showing Organization of the Petroleum Exporting Countries along with allied partners missed their production target by a record 3.58 million barrels per day (bpd) in August. The coalition's ten participating OPEC members, led by Saudi Arabia, accounted for 1.399 million bpd of the August shortfall, while their non-OPEC partners underproduced by 2.185 million bpd.

Russia, severely constrained by Western sanctions, missed the target by a massive 1.252 million bpd, with deeper losses expected later this year with the onset of a European Union-wide embargo on Russian seaborne crude exports.

Within OPEC, Nigerian production was 700,000 bpd short of its August quota amid ongoing infrastructure issues and security concerns.

OPEC+ August production quota was 43.854 million bpd. OPEC+ agreed on a 100,000-bpd increase for September, which will be effectively reversed in October.

Officials have repeatedly highlighted dwindling capacity within the group and the need for additional investment globally in the oil and gas sector. The OPEC+ Joint Technical Committee studies market conditions that feed the group's policy decisions will next meet on Oct. 4 ahead of the Oct. 5 ministerial meeting to determine November's production policy.

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

Liubov Georges