DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures on the New York Mercantile Exchange and the Brent crude contract on the Intercontinental Exchange dropped back in early trading Monday, a federal holiday, following Friday's explosive rally on planned output cuts from global producers and a strengthening U.S. dollar as the labor market remains robust while inflation is expected to have heightened in September.

While edging lower on Monday, with federal offices and bond markets closed for Columbus Day, oil futures were trading near six-week highs as Friday's (10/7) nonfarm employment report showed healthy job growth of 263,000 in September, suggesting a strong U.S. economy. Federal Reserve Bank of Atlanta's GDPNow model forecasts third quarter U.S. economic growth of 2.9% following a technical recession in the first half of 2022 defined by two consecutive negative quarterly GDP readings.

September's strong employment gains are seen keeping the Federal Reserve on course to again lift the federal funds rate, as central bank officials look to stabilize prices. On Thursday (10/13), the Bureau of Labor Statistics is expected to report the consumer price index increased 0.2% in September from August while 8.1% above year ago, indicating broadening inflation.

CME Group's FedWatch Tool shows an 81.6% probability for the Federal Open Market Committee to hike the federal funds rate by a fourth consecutive 0.75% when they meet next on Nov. 1-2. The key overnight lending rate is now in a 3% to 3.25% target range.

While bullish for the dollar, climbing interest rates will slow economic growth. Higher U.S. rates are also joined by several central banks elsewhere that are also hiking borrowing costs, which some fear will tilt the global economy into recession. The United Nations urged a pause in rate hikes last week, while the International Monetary Fund will release its world economic outlook on Tuesday as the IMF and World Bank gather in Washington, D.C. this week for their annual meeting.

Traders are also looking for a response from the White House following the Oct. 5 decision by the Organization of the Petroleum Exporting Countries and Russia-led allies to cut crude production by 2 million bpd beginning in November. A White House statement following the OPEC+ decision expressed disappointment with the production cut, and that the Biden administration would consider how to respond to the lost output, including releasing more oil from the Strategic Petroleum Reserve.

The Biden administration has also floated the idea of restricting or completely banning U.S. exports of refined fuels to ensure greater domestic inventory and lower retail gasoline prices. The United States is a net exporter of U.S. oil products, with total products exports averaging 4.6 million bpd during the final four weeks of the third quarter, more than 2.5 million bpd above the comparable year-ago period, Energy Information Administration data show.

A study by the American Council for Capital Formation in July determined a ban on oil products would force refinery closures.

"A ban on U.S. product exports would trap refinery production in the Gulf Coast region as capacity constraints on pipelines and the Jones Act-compliant vessel fleet limit the ability of Gulf Coast refiners to redistribute displaced exports to other U.S. markets," according to ACCF. "Given limited outlets for trapped exports, an estimated 1.3 million barrels per day of U.S. refining capacity (about 7% of the U.S. total) would need to be shuttered."

Near 8 AM ET, NYMEX November West Texas Intermediate futures were down $0.45 near $92.25 bbl, and ICE December Brent crude was down $0.50 near $97.45 bbl. NYMEX November ULSD futures were near 5 cents lower near $3.9685 gallon following Friday's more than 15 cents advance, and the November RBOB contract was down 2.6 cents near $2.7085 gallon.

Brian L. Milne can be reached at brian.milne@dtn.com