Oil Choppy Ahead of OPEC+ Meeting, Fed Call on Rates

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange flipped between modest gains and losses in pre-inventory trade Wednesday as investors awaited the guidance on OPEC+ production targets and rate decision by the Federal Open Market Committee that is broadly expected to deliver a smaller 0.25% increase in the face of easing inflation and a softening growth outlook.

The OPEC+ panel will likely recommend to rollover the group's current production targets into next month, according to sources, amid uncertainties around China's post-COVID demand and impact of Western sanctions on Russian oil supplies. The verdict is still out on whether China's swift re-opening from COVID lockdowns would lead to a resurgence in fuel consumption, with preliminary data suggesting that economic activity is still subdued.

In December, OPEC+ decided to rollover a 2 million barrels per day (bpd) production cut agreed in October into early 2023, with a large chunk of that cut falling on the shoulders of Gulf producers. The same target currently governs OPEC+ production policy. However, a private survey found that the collective crude output by OPEC members undershot the target by a massive 920,000 bpd. The decline in production was primarily led by the steep fall in Iraqi and Nigerian output.

Any comments around the underperformance of the cartel's key members could be moving oil markets today.

Also on Wednesday, oil traders await the release of weekly inventory data from the U.S. Energy Information Administration scheduled for 10:30 a.m. EST. The American Petroleum Institute reported late Tuesday commercial crude oil stocks unexpectedly rose 6.33 million barrels (bbls) last week compared to expectations for stocks to remain unchanged. Inventories at the Cushing, Oklahoma, tank farm, the New York Mercantile Exchange delivery point for West Texas Intermediate futures, increased 2.72 million bbls. Gasoline inventories posted a build of 2.73 million bbls through Jan. 27, just over three times calls for an increase of 900,000 bbl. Distillate supply, meanwhile, increased 1.53 million bbls, missing expectations for a 1-million-bbl draw.

In financial markets, all eyes will be on the U.S. Federal Open Market Committee meeting that concludes at 2 p.m. EST followed by the press-conference by Fed Chairman Jerome Powell 30 minutes later. Markets overwhelmingly expect the committee to agree on a 25-baisis-point increase -- a downshift for the second straight month -- but deliver a hawkish message that more rate hikes are on the horizon before inflation falls closer to the Fed's 2% target. Officials at the central bank have repeatedly pounded the message that they see interest rates rising above 5% this year and staying there until 2024, stressing the need to do more work to tame prices.

U.S. macroeconomic data released Tuesday showed labor costs increased at the slowest pace in a year, supporting the case for the Federal Reserve to ease the rate hikes in the coming meetings. U.S. businesses spent 1% more on wages and benefits for their employees last quarter compared to a 1.2% increase in the three months ending in September. Fed officials signaled they are closely monitoring the figures for signs of acceleration in wage gains. The U.S. labor market remains extremely tight despite the Fed's aggressive campaign to raise interest rates from nearly 0% a year ago to the current 4.25% to 4.5% range. The national unemployment rate remains near a 50-year low of 3.5% and weekly unemployment claims keep on falling.

Near 7:30 a.m. EST, West Texas Intermediate for March delivery gained $0.44 to $79.31/bbl, and the international crude benchmark Brent advanced to $85.74/bbl. NYMEX RBOB March contract traded mostly unchanged near $2.5652 gallon, and front-month ULSD futures softened $0.0217 to $3.1217 gallon.

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

Liubov Georges