Oil, Stocks Gain on Reports FOMC Mulls Slowing Rate Hikes

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- With the U.S. dollar falling sharply in afternoon trading Friday, oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange advanced in step with a soaring stock market. The gains came after the Wall Steet Journal reported some Federal Reserve officials are considering slowing the pace of rate hikes toward the end of year to reassess the impact of tightening monetary policy on the broader economy.

The Federal Open Market Committee is expected to raise federal funds rates by another 0.75% at their Nov. 1-2 meeting, which would be the fourth consecutive rate hike of this magnitude in as many meetings. Fed officials are raising rates at the most aggressive pace since the early 1980s, and some of them are becoming increasingly concerned about a deep recession as rate hikes work themselves into the economy.

"I worry that if the way you judge it is another bad inflation report must be that we need more rate hikes ... that puts us at somewhat greater risk of responding overly aggressive," said President of Chicago Federal Reserve Charles Evans this week.

"We will have a very thoughtful discussion about the pace of tightening at our next meeting," Fed Governor Christopher Waller said in a speech earlier this month.

Other Fed officials are frustrated with the lack of progress in curtailing inflation despite tighter monetary conditions. "Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year," said Philadelphia Fed President Patrick Harker in remarks Thursday in Vineland, New Jersey.

In response to Friday's reports, investors sharply reduced bets on another 0.75% rate increase in December, down from 77% seen just a day ago to 45.4% today, showed CME Fed's Watch Tool.

This week also saw increased volatility in global financial markets partly because political turmoil in Great Britain spilled into currency and bond markets, pressuring the oil complex. Financial markets are likely to remain volatile in the coming days until the United Kingdom selects a new prime minister, but the hope is the departure of embattled UK Prime Minister Lizz Truss could bring back credibility to the UK government.

Britain's economy has been hammered by double-digit inflation and rising interest rates. Inflation in Great Britain climbed above 10% in September for the second time this year, with prices for essential food items such as milk, eggs and bread having spiked more than 15% from a year ago. Truss' departure alone doesn't change the impact of inflation and energy crisis on British consumers.

Much of Truss' economic agenda has already been dismantled with a major reversal on tax cuts and spending plans. What is still on the table is a government guarantee on energy costs that caps utility bills for households at £2,500 until April 2023. Some analysts estimate that after April the average household utility bill could climb as high as £6,500.

Also in Europe, European leaders agreed Friday to a temporary price corridor for natural gas transitions to prevent "extreme volatility and excessive prices" by blocking gas transactions above a certain level." They also said they would pursue a temporary framework to cap the price of gas in electricity generation, including a cost and benefit analysis. Natural gas in Europe fell, with benchmark futures traded at Dutch's Title Transfer Facility declining as much as 4.8% on Friday and headed for a third straight weekly loss.

Before Vladimir Putin's invasion of Ukraine, the EU got 40% of its gas imports from Russia's vast pipeline network that have been depressing the wholesale gas prices on the continent. Today, the share of Russian gas on European market has fallen to 7.5%.

At settlement, West Texas Intermediate futures advanced $0.54 to $85.05 per barrel, and the international crude benchmark for December delivery finished $1.12 per barrel higher at $93.50 per barrel. ULSD futures for November delivery rallied 7.55 cents to $3.8323 a gallon, and November RBOB futures rose 1.42 cents to $2.6620 per gallon.

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

Liubov Georges