DTN Oil

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange flipped between modest gains and losses early Thursday as investors parsed through Federal Reserve Chairman Jerome Powell's hawkish comments as the central bank doubles down in its fight against inflation, lifting the U.S. dollar index off a seven-month low in overnight trade, while a partial restart of the shuttered Keystone pipeline that was halted last week due to a leak further pressured the oil complex.

TC Energy said late Wednesday that it has restarted operations on sections of the pipeline that were unaffected by the line rupture, including the lines that extend 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 and further south to the Texas refining center 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 610,000-bpd Keystone pipeline was shut down Dec. 7 after a leak was detected in Kansas, leading to a spill of 14,000 bbl into a nearby creek, which has already become the largest onshore U.S. oil spill in over a decade. A weeklong shutdown of the Keystone pipeline limited the flow of heavy crude oil to Gulf Coast refiners, which need a steady diet of heavy crude to offset the light oil from the Permian to produce middle-of-the-barrel distillate fuel. 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 on 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.

In financial markets, the U.S. dollar clawed back some of Wednesday's losses against a basket of foreign currencies to trade 0.58% higher at 104.345, further pressuring the front-month West Texas Intermediate contract. Greenback's move higher follows the Federal Open Market Committee's announcement of a 0.5% increase in the federal funds rate at the conclusion of its Wednesday meeting, in line with market expectations and a stepdown from the 0.75% rate hikes from the previous four meetings. However, the focus remained with FOMC'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. 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 a hill 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 for the economy, 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.

Near 7:30 AM ET, January WTI futures traded little changed at $77.30 bbl, and February Brent futures on ICE were also near unchanged at $82.70 bbl. NYMEX January RBOB futures slipped $0.0136 to $2.2444 gallon and January ULSD futures declined $0.0454 to $3.2313 gallon.

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