Oil Slips as Traders Assess Macro Data, Fed Signals

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Following Wednesday's sell-off triggered by bearish inventory data in the United States, oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange softened again early Thursday as markets digested the latest releases of macroeconomic data and comments from the Federal Reserve Chairman Jerome Powell who left the door open for a potential pause in raising interest rates as the committee assesses the pace and scope of disinflation across the broader economy.

In line with market expectations, the Federal Open Market Committee (FOMC) raised its benchmark interest rate by 25 basis points Wednesday, lifting the target range to 4.5% to 4.75%. "The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time," read the FOMC statement. In a news conference following the rate decision, Chairman Jerome Powell, however, struck a more dovish tone than many anticipated, acknowledging that disinflationary processes have begun in some sectors of the economy, particular in goods, but have yet to spread into the broader economy. U.S. manufacturing is already in a recession based on the latest monthly report from the Institute for Supply Management (ISM) 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 last month in 2-1/2 years, meaning the recession that is well under way in the manufacturing sector has only begun to affect services.

"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 Powell in his press conference.

Despite the call for caution, markets still expect the Fed to start cutting rates later this year after raising them by 25 basis points one more time in the March meeting. While addressing the gap between the Fed's projections and market expectations, Powell said, "Markets bet on inflation coming down much quicker than we do. If data shows inflation coming down quickly, that will play into our policy setting, of course."

Next, investors will turn their focus to U.S. weekly unemployment claims, with consensus calling for a slight uptick to 193,000 after claims fell to their lowest since September. The U.S. labor market remains extremely tight with the unemployment rate near a 50-year low of 3.5%, job vacancies rising again to above 11 million, and weekly unemployment claims giving little indication that employers are laying off workers. Labor demand substantially exceeds the supply of available workforce, ensuring the labor market remains out of balance.

Wednesday's EIA inventory report was overwhelmingly bearish, showing U.S. total oil and petroleum product stocks surged by 9 million barrels (bbls) in the final week of January as refiners hit the brakes on runs. Out of that build, 4.1 million bbls were realized in commercial crude oil inventories, which lifted total commercial stocks to 4% above the five-year average. The build in crude stocks occurred as domestic refineries reduced the run rate 0.4% to 85.7% of capacity while analysts expected runs to have recovered for a fourth week after plunging to a 79.6% utilization rate in late December. For the week, refiners processed an average of 15 million barrels per day (bpd) of crude oil. Oil stored at the Cushing, Oklahoma, hub, the delivery point for WTI, jumped 2.3 million bbls from the previous week to 38 million bbls.

Near 7:40 a.m. EST, West Texas Intermediate futures for March delivery declined $0.46 bbl to $75.98 bbl. International crude benchmark Brent contract fell by a steeper $0.63 to $82.16 bbl. NYMEX RBOB March contract slipped to $2.4459 gallon and March ULSD futures sank $0.0284 to $2.9233 gallon.

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

Liubov Georges