Oil Eases as USD regains Momentum as ECB, BOE Signal Pause

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange declined for the second session on Thursday, dragged lower by building crude inventories domestically amid signs of recession in manufacturing, and a firmer U.S. dollar index that bounced off a seven-month low in afternoon trading.

Greenback's move higher came on the back of expectations for global central banks to soften the path of interest rate increases this year as they assess incoming data on inflation and the labor market. Aside from the Federal Reserve raising interest rates for the eighth consecutive meeting this week, European Central Bank, Bank of England, and Bank of Canada lifted their lending rates to the highest level in almost two decades. However, it was their forward guidance that caught the attention of markets. The Bank of Canada became the first G10 central bank to signal a pause in monetary tightening amid signs of a sharp slowdown in economic activity.

"There is growing evidence that restrictive monetary policy is slowing activity, especially household spending," the BoC, led by Governor Tiff Macklem, said in a statement on Wednesday.

The BOE, led by Governor Andrew Bailey, announced on Thursday a larger 50-point increase in its lending rate but said further rises would only be needed if there were new signs that inflation is reaccelerating. Finally, the ECB confirmed expectations for a 50-basis point increase on Thursday, adding that "there are signs that inflation is abating."

Eurozone inflation fell for the third straight month in January, flash figures published Wednesday showed, but headline inflation remained high at 8.5%. Core inflation, which excludes energy and food, was flat at 5.2%.

In the United States, inflation eased from an early summer peak of 9.1% annual rise to 6.5% currently, but much of that decrease came from the energy and goods sectors, leaving a large chunk of the service-oriented economy still mired in high prices.

"Disinflationary process is really in its early stage. You have a credible story in goods and housing. The issue is that we have a large core service sector where we don't have a disinflation yet," noted Fed Chairman Jerome Powell in a news conference Wednesday afternoon.

U.S. manufacturing is already in recession based on the latest monthly report from the Institute for Supply Management released Wednesday, with the headline index slipping to its lowest level since the first wave of the pandemic in March and April 2020 and before that the recession in June 2009. In contrast, services PMIs fell into contraction for the first time in 2-1/2 years last month, meaning recession that is well under way in manufacturing has only begun to affect services.

Next, investors will turn their focus to U.S. Non-Farm Employment Report for January scheduled to be released by the Labor Department 8:30 AM ET on Friday. U.S. employers likely added 185,000 new jobs last month, a slowdown from job growth of 223,000 seen in December 2022.

U.S. labor market remains extremely tight with the unemployment rate near a 50-year low 3.5% currently, job vacancies rising again to above 11 million based on the latest monthly Job Openings and Labor Turnover Survey, and weekly unemployment claims give little indication that employers are laying off workers. Jobless claims fell again last week to 183,000 compared with 193,000 expected. Labor demand substantially exceeds the supply of available workforce, ensuring the labor market remains out of balance.

At settlement, West Texas Intermediate futures for March delivery declined $0.53 bbl to $75.88 bbl. International crude benchmark Brent contract fell $0.67 to $82.17 bbl. NYMEX RBOB March contract slipped to $2.4523 gallon and March ULSD futures dropped back $0.0544 to $2.8967 gallon.

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

Liubov Georges