DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange settled Thursday's session sharply lower, with West Texas Intermediate sliding below $82 barrel (bbl) on the spot continuation chart as investors recalibrated bets for a deeper recession next year after Fed officials signaled interest rates could go much higher than currently priced in by markets.

St. Louis Federal Reserve President James Bullard said on Thursday the central bank might need to raise the federal funds rate to 5% to 7% range in order to bring down inflation. The federal funds rate currently stand between 3.75% and 4%. "The policy rate is not even yet in a zone that might be considered sufficiently restrictive. Monetary tightening has had limited effect on prices so far," he added.

For context, officials in September projected rates increasing to around 4.6% in 2023. Those projections will be updated at the Federal Open Market Committee meeting Dec. 13-14.

Bullard was not the only Federal Reserve official who struck a hawkish tone this week. Federal Reserve Governor Christopher Waller said on Wednesday in his view the central bank's policy is barely restrictive, adding, "We have a long way to go in terms of raising interest rates."

Waller further added it was too soon to conclude that inflation had peaked or that the central bank would be able to end its rate increases early next year. He pointed to the summer months last year when inflation pressures appeared to be easing but later reaccelerated.

Inflation in October moderated to 0.4% from 0.6% monthly gain seen over the previous month, which has brought an annualized increase in consumer prices to 7.7%.

U.S. retail sales, meanwhile, surprised in October with a 1.3% gain after an unchanged reading in September, according to data from Commerce Department. Americans spent more on everyday items such as gasoline and food, but they also shelled out more on discretionary spending such as cars, furniture, and restaurant meals. Some economists suggest the jump in October retail sales could be a sign of an early holiday shopping season.

Underlying Thursday's losses in the oil complex are also reports of a partial return of Russian oil flows through Druzhba network -- a key pipeline that delivers Russian oil to landlocked countries in Central and Eastern Europe.

Hungary's oil and gas company MOL confirmed that oil flows through the Druzhba pipeline resumed on Wednesday afternoon after a brief power cut on the Ukrainian side. On Tuesday, Ukraine notified European partners that it had suspended oil pumping via Druzhba pipeline in direction of Hungary due to an unidentified technical reason.

"The reason for the suspension of supplies has not yet been officially confirmed by the Ukrainian side," said Slovakia's Transpetrol in a statement, adding that it is still gathering information before it can reveal details.

Oil futures briefly spiked Tuesday amid a perceived risk of a supply disruption that coincided with a large explosion in eastern Poland near the Ukrainian border that raised widespread alarm among members of the North Atlantic Treaty Organization of a possible expansion of the war in Ukraine. However, Wednesday morning Polish President Andrzej Duda said there was no evidence suggesting the missile that hit a Polish border town with Ukraine was an intentional attack by Russia. The missile was likely an old Soviet Union rocket deployed by Ukrainian anti-air defense said the Polish president. This week, Russia launched numerous missiles at Ukrainian cities in one of the largest barrages of missile attacks since the Feb. 24 invasion of Ukraine.

In financial markets, the U.S. Dollar Index regained ground against a basket of foreign currencies to settle at 106.610 as investors digest recent comments from Fed officials that point to more rate hikes in coming months.

NYMEX December West Texas Intermediate futures ended the session $3.95 lower at $81.64 bbl, and January Brent futures on ICE declined $3.08 to $89.78 bbl. December NYMEX RBOB futures fell 5.33 cents to $2.4547 gallon, with December ULSD futures 8.88 cents lower at $3.5248 gallon.

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