DTN Oil

WASHINGTON, D.C. (DTN) -- Following a three-day advance, West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange declined on Thursday after softer-than-expected economic data in the United States, China, and Eurozone brought demand concerns back into focus as market participants weighed the prospects of higher borrowing costs next year.

Thursday's selloff follows a hawkish message from the European Central Bank that opted for a smaller 0.5% increase in its benchmark interest rate on Thursday but signaled borrowing costs would go "significantly" higher next year to tame inflation.

At a news conference following the announcement, ECB President Christine Lagarde said, "Anybody who thinks this is a pivot for the ECB is wrong. We're not pivoting, we're not wavering, we are showing determination and resilience in continuing a journey where we have ... If you compare with the Fed, we have more ground to cover. We have longer to go."

European stocks plummeted in reaction to LaGarde's hawkish tone, sending pan-European Stoxx 600 2.8% lower on the session, with German and French indexes both plunging more than 3%. Stocks on Wall Street followed in step with the selloff across European markets, with Dow Jones Industrials closing the session 764 points lower.

ECB's rate announcement comes a day after U.S. Federal Reserve raised its federal funds rate 0.5%, in line with market expectations, and a stepdown from the 0.75% rate hikes from the previous four meetings. However, the focus remained with the Federal Open Market Committee's economic projections that showed a rather bleak outlook for the economy next year, with GDP growth expected to expand by just 0.5%, 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.

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.

While addressing the question about the outlook for the economy, Federal Reserve Chairman Jerome Powell in a news conference Wednesday afternoon acknowledged that, "it all boils down to how fast inflation will go down. The last two CPI reports were 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.

Further weighing on the oil complex, TC Energy, the operator of the 610,000 bpd Keystone pipeline, said it had partially restarted the pipeline that was unaffected by the rupture detected on Dec. 7. The restarted line extends from Alberta, Canada to Steele City, Nebraska, and from Steele City to the refining center in Illinois at Wood River and Patoka. A segment of the pipeline that brings oil from Steele City to the Cushing, Oklahoma storage hub won't be restarted until it is safe to do so, and after the company receives approval from federal regulators. The company said it continues to investigate the spill.

The shutdown has limited the flow of heavy crude to Gulf Coast refiners that utilize the heavier crude grades for diesel production. U.S. Energy Information in its inventory report released Wednesday said refiners in the Gulf Coast cut utilization capacity by 3% during the week-ended Dec. 9.

The disruption has yet to show an impact to inventory levels at the Cushing hub, with EIA reporting a 426,000 bbl build last week that lifted stocks there to 24.4 million bbl. Commercial crude oil inventories last week jumped 10.2 million bbl during the week-ended Dec. 9, contrary to expectations for a 3.1 million bbl drawdown. The supersized build was, in part, realized on the back of a 4.7 million bbl transfer of crude oil from the nation's Strategic Petroleum Reserve to the commercial side.

At settlement, January WTI futures declined $1.17 to $76.11 bbl, and February Brent futures on ICE dropped to $81.21 bbl, down $1.49 bbl. NYMEX January RBOB futures fell $0.0776 to $2.1668 gallon and January ULSD futures edged up to a $3.2313 gallon settlement.

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