DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange fell for a second straight session on Wednesday. The losses came as investors repriced the likelihood of a U.S. recession sparked by comments from Federal Reserve Chairman Jerome Powell addressing the need for higher interest rates to slow down a hot labor market, while weaker demand for middle distillates suggests the manufacturing sector of the economy has already fallen into recession.

U.S. demand for middle distillates, which closely correlates with industrial activity, eroded by a full 1 million barrels per day (bpd) below the comparable 2022 consumption rate to 3.514 million bpd -- the lowest consumption rate since the holiday week of Dec. 29. Distillate fuel consumption on a four-week average basis is 15% or 645,000 bpd below the year-ago demand pace at 3.753 million bpd. This continues to speak to what macroeconomic data suggests is an outright recession in U.S. industrial and manufacturing activity.

The recent data revealed business activity in the manufacturing sector remained in contraction for a fourth straight month in February, with the headline index falling to its lowest level since May 2020 -- when the U.S. economy was in COVID-19 lockdown.

Against this backdrop, comments from Powell, who signaled this week that the central bank is prepared to speed up the pace and scope of rate hikes to cool stubborn inflation, have reignited fears over a widespread recession.

Wednesday's economic data showed the labor market has yet to cool off, with job openings falling less than expected in January and February's ADP private payroll report also coming in stronger than anticipated.

"The Fed right now should have the door wide open to a 50-basis-point move in March," former U.S. Treasury Secretary Larry Summers told Bloomberg. "A reasonable assessment of where the Fed is would say that they have not been this far behind the curve for a year or so."

The Federal Open Market Committee will meet for a two-day policy meeting on March 21-22 to decide on its next rate move. More than 70% of investors anticipate the FOMC will lift the federal funds rate by 50 basis points during the meeting, up from 30% seen only a week ago. What's more, markets raised the expected peak rate, known as the terminal rate, to a 5.5% to 5.75% target range to be reached as early as June, implying a full 1% increase in the key overnight borrowing rate for banks between now and the FOMC's June 14 meeting.

Although inflation has slowed in recent months from a peak of 9.1% mid-summer 2022 to 6.4% in January, it's still far above the Fed's 2% target, and Powell and other Fed officials have cautioned that disinflation will be bumpy and there is a long "way to go." What is more troubling, inflationary pressures have partially reversed the downtrend at the start of the year, with consumer spending remaining strong and the job market adding a staggering 572,00 new jobs.

At settlement, West Texas Intermediate futures for April delivery declined $0.92 to $76.66 per barrel (bbl), and the international crude benchmark Brent contract with May delivery dropped back to $82.66 per bbl, down $0.63. NYMEX RBOB April futures fell $0.0118 to $2.6889 per gallon, and ULSD April futures lost $0.0556 to $2.7419 per gallon.

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