DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures on the New York Mercantile Exchange settled mixed Tuesday, with West Texas Intermediate's March contract expiring at a two-week low on a rallying U.S. dollar, while ICE Brent futures settled down, erasing Monday's advance following comments from Russian Deputy Prime Minister Alexander Novak clarifying guidance on Russian oil production.

A stronger-than-expected U.S. Purchasing Manager's composite index for February released Tuesday morning was the latest data point boosting expectations the Federal Reserve would remain hawkish on monetary policy, with the service component of the index at 50.5 showing growth against market consensus for a 47.2 reading. Manufacturing remained below the 50-demarcation line dividing growth and contraction, but at 47.8 was more than an anticipated 47.3 reading.

The U.S. PMI Composite for February follows data for January showing a surge in retail sales, up 3%, job growth of 517,000, and the national unemployment rate falling to a more than 50-year low at 3.4%, indicating consumers continue to spend and businesses continue to hire despite inflationary pressure and climbing interest rates.

Atlanta Federal Reserve Bank's GDPNow Tracker projects annualized growth in the U.S. economy for the first quarter at 2.5%, gaining since Feb. 8 when it showed a 2.2% growth rate. While a slowdown from the fourth quarter 2022 when a preliminary reading by the Bureau of Economic Analysis estimated a 2.9% annualized growth rate, the U.S. economy is showing resilience in the face of high prices and interest rates, making the central bank's job of lowering inflation more difficult.

That outlook was lent support from the Consumer Price Index for January that surprised to the upside with a 0.5% monthly gain even as the annual increase in headline inflation dipped 0.1% to 6.4%. Yet it was a 0.7% surprise jump in the Producer Price Index in January, up 9.1% year-on-year for the largest annual increase in more than 40 years, that erased fading hope that the Fed would pivot from its hawkish position on monetary policy.

Market expectations for a 50-point hike in the federal funds rate when the Federal Open Market Committee meets next on March 21-22 has increased, although remains a minority based on CME's FedWatch Tool with a 24% probability. Nonetheless, most Fed watchers anticipate three more 25-point increases in the federal funds rate, now in a 4.5% by 4.75% target range, through June that would lift the overnight lending rate between banks to 5.5%.

The U.S. dollar index rallied during Tuesday's session, settling up 0.3% at a 104.112 seven-week high against a basket of foreign currencies. The stronger dollar weighed on WTI futures that are also under pressure from building U.S. crude stocks that have increased every week in 2023 so far, with inventory building 50.8 million bbl or 12.1% during the first six months of the year.

NYMEX March WTI futures expired down $0.18 at $76.16 bbl, with the April contract ending at a $0.20 premium at $76.36 bbl. Building crude inventory has weakened WTI's market structure, with the April through August contracts settling in a tight $76.10 by $76.56 bbl range Tuesday.

ICE April Brent futures settled Tuesday's session down $1.02 at $83.05 bbl, erasing Monday's $1.07 advance following comments from Novak early in the session that a previously announced 500,000 bpd cut in Russian oil production is only for March, and that the baseline will be off January output which was between 9.8 and 9.9 million bpd, according to Reuters.

Earlier this month, Novak offered no timeline on the 500,000 bpd cut in Russian oil production, which was announced in response to price caps imposed on Russian oil products by G7 countries that took effect Feb. 5. G7 price cap of $60 bbl was imposed on Russian crude on Dec. 5, 2022.

NYMEX March RBOB futures settled a modest $0.0074 higher at $2.4516 gallon Tuesday.

NYMEX March ULSD futures reversed off Friday's $2.6577 13-month low on the spot continuous chart to settle $0.798 higher at $2.7919 gallon on Tuesday, underpinned by a powerful winter storm moving east across Canada and the northern part of the United States to the Northeast.

While Minnesota is expected to feel the brunt of the storm, blizzard conditions will abound. DTN Frontier Weather forecasts the potential for heavy snow in northern New York and northern New England on Thursday and Friday, and artic air through the weekend.

Brian Milne can be reached at brian.milne@dtn.com