DTN Oil

WASHINGTON (DTN) -- Pressured by a stronger U.S. Dollar Index and a selloff in equity markets, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange plummeted more than 3% early Friday as investors repriced the risk of the U.S. Federal Reserve bringing back larger interest rate increases in the coming months to combat stubbornly high inflation and a tight labor market.

The president of the St. Louis Federal Reserve Bank James Bullard told reporters Thursday that he would not rule out raising interest rates by a half percentage point at the March meeting rather than a quarter point, citing upside risks to sticky inflation.

"My overall judgment is it will be a long battle against inflation, and we will probably have to continue to show inflation-fighting resolve as we go through 2023." said Bullard, adding that he prefers to raise the Fed's funds rate to 5.375% as soon as possible. Currently, the Fed's funds rate stands in the range of 4.50%-4.75%.

Bullard's comments echoed earlier remarks from Cleveland Federal Reserve President Loretta Mester who saw "a compelling economic case for another 50-basis rate increase at the Fed's February meeting."

The hawkish comments from the two Federal Reserve officials followed a string of strong inflation data for January, including the Producer Price Index (PPI) and Consumer Price Index (CPI) that showed underlying inflation is stickier than previously thought. The PPI rose 0.7% at the start of the year -- the most since June 2022 when underlying inflation on the consumer level was rising at a rate of 1.3%. The concern is that prices paid by producers today will be translated into prices consumers will pay tomorrow, although the lag of that transmission is still a subject of debate among economists.

U.S. retail sales jumped 3% last month -- the most in nearly two years despite elevated inflation and evidence of sectorial slowdown in parts of the economy. Americans once again spent more on cars, furniture, and purchases at department stores after only briefly pulling back on spending at the end of 2022.

The U.S. labor market added slightly more than half a million new jobs at the start of the year, signaling that people who stayed on the sidelines in post-pandemic months are returning to the labor force.

"The demand side of the economy is not weakening quite as fast as some thought it was," added Mester.

As investors repriced the outlook for the Fed's funds rate, U.S. equities plunged, the dollar rallied to multi-week highs and yields on Treasury bonds jumped. As of 7:45 a.m. EST, the S&P 500 was down 0.63%, and the Dow Jones Industrial Average fell 0.45%. The CBOE Volatility Index was up 5.74%.

NYMEX West Texas Intermediate futures for March delivery declined $2.54 to $75.95 barrel (bbl), with the April contract trading at a $0.26 premium to the front-month contract. On ICE, April Brent crude fell $2.58 to $82.56 bbl. NYMEX RBOB March contract dropped $0.0864 to $2.3491 gallon, and March ULSD futures fell $0.0894 to $2.7214 gallon.

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