DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled Wednesday's session between 2.5% and 5% higher, although all petroleum contracts pared earlier gains. This came after the Federal Open Market Committee slowed the pace of interest rate increases to 0.5% amid a sharp pullback in economic growth but projected a higher terminal rate next year.

The Federal Reserve on Wednesday sent an unmistakably clear message to the market -- the central bank is prepared to raise interest rates further into restrictive territory even at the expense of economic growth and health of the labor market.

In its December economic projections released Wednesday afternoon, FOMC forecasts U.S. gross domestic product would expand by just 0.5% in 2023, expecting the economy to barely grow, and down from their 1.2% growth outlook in September. FOMC expects the national unemployment rate to rise to 4.6% next year compared with a 3.7% jobless rate in November. For context, that would translate into 1.6 million Americans losing their jobs next year.

What's more hawkish, median projections for the peak federal funds rate is now seen ending 2023 at 5.1%, up from 4.6% in September's projections. The federal funds rate is now in a 4.25% to 4.5% target range, meaning the central bank is projecting to lift the key overnight borrowing rate by another 0.75% over the course of 2023.

The Fed's hawkish message comes on the heels of a softer inflation report for both October and November, showing an accelerated downtrend in consumer prices from their summer peak of 1.3% to a monthly gain of just 0.1%. While addressing the question about the outlook on inflation, Fed Chairman Jerome Powell in a news conference Wednesday afternoon acknowledged that the last two CPI reports are "a welcome reduction in inflationary pressures, but the central bank needs substantially more evidence that inflation is moving towards the Fed's 2% target."

On an annualized basis, inflation was still above 7% in November -- more than three times greater than the Fed's goal.

Markets had a mixed response to the Fed's hawkish message, with Dow Jones Industrials declining more than 1% at the start of Powell's news conference before clawing back some of those losses to finish the session 0.4% lower.

The U.S. dollar index, which initially rallied on the 0.5% increase in the federal funds rate, was unable to find support from Powell's comments, settling at a six-month low of 103.739 against a basket of foreign currencies.

In the oil complex, January West Texas Intermediate futures advanced $1.89 to settle the session at $77.28 per barrel (bbl), and February Brent futures on ICE rallied $2.02 to $82.70 per bbl. NYMEX January RBOB futures moved up $0.0835 to $2.2444 per gallon and January ULSD futures surged $0.1846 to $3.2768 per gallon.

Underpinning support for the oil complex was an upbeat demand forecast from the International Energy Agency that lifted global oil consumption growth expectations to 2.3 million barrels per day (bpd) this year and 1.7 million bpd in 2023, up 140,000 bpd from the prior month's projection.

"Despite the seasonal slowdown in world oil demand and continued macro-economic headwinds, recent oil consumption data have surprised to the upside. This was especially apparent in non-OECD regions, including China, India and the Middle East," said IEA in its December Oil Market Report released Wednesday morning.

The IEA warned the global oil market could face a tighter supply-demand balance next year as the full impact of an EU embargo and G7 price cap on Russian crude exports remain to be seen.

So far, crude loadings out of Russian ports were largely unchanged, even as shipments to EU countries fell to just 1.1 million bpd. Private shipping data collected by Bloomberg indicates the falloff in Russian oil exports to EU countries is even steeper at just 215,000 bpd in the four weeks ending Dec. 9. Bulgaria was the only European destination for Russian crude in the final three weeks of the period.

IEA estimates Urals crude oil sold in Northwest Europe fell to nearly $30 bbl below the global benchmark to $43 per bbl in early December, which is well below the $60-per-bbl price cap agreed to by G7 and the European Union. Despite the low selling price for Russian crude, Moscow said it would rather cut oil production then cooperate with the price cap mechanism.

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