DTN Oil

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange advanced on Wednesday in line with rallying equity markets after Federal Reserve Chairman Jerome Powell hinted at a downshift in the pace of rate hikes that could come as soon as December to, in part, assess the lagged effects of monetary tightening on aggregate economic activity.

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down," Powell said in a speech at the Brookings Institution in Washington, D.C. this afternoon.

The assessment signaled the central bank is now ready to step down from its steep 75-point basis increases in the federal funds rate to 50 basis points at its Dec. 14th meeting -- an adjustment the market has widely anticipated. 75% of investors expect the Federal Open Market Committee will raise the federal funds rate by 50 basis points next month compared with 25% who bet on a larger rate hike. The FOMC has raised rates six times so far this year, with four of those increases by a historically large 75 basis points.

Powell cautioned however, the central bank would continue to raise rates well into 2023 as it needs "more evidence that inflation is actually declining," adding that "by any standard, inflation remains much too high."

The Fed has walked a fine line in recent weeks, trying to signal that, while it will soon back off the ultra-aggressive pace of rate hikes, the battle against inflation is far from over.

The labor market is still resilient in the face of rising interest rates, with the latest Job Openings and Labor Turnover Summary report showing new job openings remained above 10 million in October, although down by 353,000 from the previous month. Friday's nonfarm employment report is expected to show 200,000 new jobs were added this month, down from the 261,000 new positions reported in October, although still a strong growth rate.

Supportive economic data coupled with Powell's dovish comments sent the U.S. dollar index lower against a basket of foreign currencies to settle at 105.897, while lending support to West Texas Intermediate futures.

The WTI January contract advanced $2.35 to settle at $80.55 bbl. January Brent futures on ICE expired $2.40 higher at $85.43 bbl, and the February contract expanded its premium against the expiring contract to a $1.54 contango. December RBOB futures on NYMEX gained to $2.4185 gallon in its last day of trading, with the January contract settling at $2.3847 gallon after a $0.0969 advance. December ULSD futures added $0.0670 to expire at $3.3629 gallon, and the next month contract gained to $3.3635, up $0.1196 in afternoon trading.

Further supporting the oil complex, U.S. Energy Information Administration reported midmorning Wednesday commercial crude oil inventories declined by a massive 12.581 million bbl last week -- the largest weekly change so far this year. The large drawdown was accompanied by a 1.4 million bbl withdrawal of crude oil from the Strategic Petroleum Reserve. There was little change in crude inventory at the Cushing storage hub in Oklahoma, where stocks edged a modest 415,000 bbl lower to a 24.315 million bbl four-month low. The steep drawdown, likely partly influenced by ad valorem taxes on inventory held at year-end in Texas and Louisiana, occurred as the national refinery run rate spiked 1.3% to 95.2% of capacity, the highest utilization rate since August 2019. PADD 3 Gulf Coast refineries drove the big increase in runs, with utilization jumping 2.3% to 98.2% of capacity, a four-year high. Crude inputs at refineries increased 228,000 bpd or 1.4% to 16.638 million bpd, a five-month high.

The surge in refinery production, however, boosted gasoline and distillate fuel inventories during the week-ended Nov. 25, with gasoline stocks building by 2.8 million bbl to 213.8 million bbl, and distillate stocks up 3.5 million bbl to 109.1 million bbl. Despite those builds, total U.S. stocks not including the SPR were drawn down 8.8 million bbl to 1.211 billion bbl, a four-month low.

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