DTN Oil

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled Tuesday's session sharply higher propelled by comments from Federal Reserve Chairman Jerome Powell, who signaled the central bank still expects inflation to come down significantly this year without tilting the labor market into recession, spurring an afternoon selloff in U.S. bonds and the dollar index.

U.S. equities rallied, the dollar nosedived against foreign currencies, and Treasury yields retreated as investors digested the latest comments from Powell that once again were received as dovish by the market.

When addressing Friday's strong employment report, Powell said, "It's a good thing that inflation has started to come down not at the expense of a strong labor market. But it shows you why the Fed thinks that bringing down inflation would be a process that takes significant time."

It appears Powell reiterated the same message he delivered at last week's news conference following the Federal Open Market Committee's Feb. 1 decision to raise the federal funds rate by 0.25%. The smaller rate hike from previous FOMC meetings was conditioned upon how incoming data affects its progress in fighting inflation, a policy central bank officials said would guide future decisions on interest rates.

"The disinflationary process, the process of getting inflation down, has begun and it's begun in the goods sector," Powell repeated. "But it has a long way to go. These are the very early stages of disinflation."

In the aftermath of Powell's remarks, U.S. Fed Funds futures indicate the majority of the investors still expect the Fed to lift rates by 25-basis points in March followed by yet another rate hike of a similar size in May after which the central bank will keep the federal funds rate in a 5% to 5.25% range before cutting rates for the first time in December.

On the session, the U.S. dollar shed 0.26% against a basket of foreign currencies to 103.298, spurring gains for front-month West Texas Intermediate futures that spiked to $77.14 bbl, up $3.03 on the session. The international crude benchmark Brent contract on ICE advanced to $83.69 bbl, up $2.70 bbl. NYMEX RBOB March contract rallied $0.0834 to $2.4568 gallon, and March ULSD futures climbed to $2.9044 gallon after trading at a $2.6653 one-year low on the spot continuous chart.

Also on Tuesday, oil traders awaited the late afternoon release of the weekly inventory report from the American Petroleum Institute, followed by government data Wednesday morning. U.S. oil inventories are estimated to have risen by 1.8 million bbl for the week ended Feb. 3, with expectations ranging from a decrease of 1.6 million bbl to an increase of 3.3 million bbl. Nationwide crude oil inventories have risen for each of the last six weeks, building by 32 million bbl so far this year. At 452.7 million bbl, U.S. crude oil inventories are about 4% above the five-year average.

Gasoline stockpiles are expected to have increased by 1.4 million bbl and stocks of distillates are seen to have edged up by 200,000 bbl. Refinery use likely increased by 0.5% to 86.2% of capacity after refiners unexpectedly cut run rates in the final week of January.

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