DTN Oil

WASHINGTON, D.C. (DTN) -- Reversing earlier losses, West Texas Intermediate on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange settled Monday's session higher supported by a sharp retreat in the U.S. dollar index as investors positioned ahead of the two-day policy meeting by the Federal Open Market Committee this week when central bank officials are expected to deliver another round of rate increases amid still high inflation and a growing crisis of confidence in the U.S. banking sector.

The FOMC meeting on Tuesday and Wednesday will be the first since the failure of two midsized U.S. banks threw financial markets into chaos. Still, inflation remains too high for the Federal Reserve to pause raising interest rates even as fear around financial instability has taken center stage. At the moment, 73% of investors expect the FOMC to raise the federal funds rate by 25 basis points at the conclusion of Wednesday's meeting compared to 27% who believe the central bank will pause any further rate hikes.

"In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate increase at its March 22 meeting with considerable uncertainty about the path beyond March," Goldman Sachs analysts wrote in a note to clients last week.

On the flip side, no rate hike might spook investors who consider it to be a sign that the banking turmoil is much worse than many have thought.

Earlier this month when testifying before Congress, Fed Chairman Jerome Powell said the U.S. central bank was "prepared to increase the pace of rate hikes," and "the ultimate level of interest rates is likely to be higher than previously anticipated."

However, since these comments were made, the United States has witnessed two major bank failures, requiring direct intervention by the federal government at a historic scale to protect depositors.

"For credibility's sake, the Federal Reserve will probably raise rates 25 basis points. I would think that that would be the last increase," said Jeffrey Gundlach, founder and chief executive of DoubleLine Capital.

As traders positioned ahead of the FOMC meeting, recession fears have underpinned the narrative in the oil market, with investors raising the odds for the U.S. and European economies to slide into a downturn in the coming months. Slower growth means less demand for commodities like oil that is closely correlated with economic activity.

The International Energy Agency estimated that 120 million bbl of crude oil have been transferred to oil storage across industrialized countries over the past three quarters as demand continues to lag far behind supply growth. Even with China reopening from its COVID shutdowns, analysts don't expect that balance to shift for months.

"WTI continued to slump in physical differentials amid ongoing US crude stock builds. Optimism surrounding China's reopening faded in the face of the hawkish drift in central bank policy," said the IEA in their March Oil Market Report released March 15.

Against this backdrop, OPEC+ ministers have dismissed the idea that the group could deepen production cuts to support prices despite a deteriorating demand outlook. OPEC+ agreed last October to cut oil production by 2 million bpd -- a decision that has drawn sharp criticism from U.S. and European officials that have battled high gasoline prices. In retrospect, those cuts might have been too modest should major economies enter recession. So far, the cartel will likely remain in "wait-and-see mode" until the FOMC concludes its policy meeting on Wednesday. OPEC+ ministers will meet on April 3 to decide on their joint production strategy.

At settlement, the WTI contract for April delivery advanced $0.90 to $67.64 bbl after falling to $64.12 bbl better-than 15-month low on the spot continuous chart in overnight trade. The WTI May contract settled the session $0.18 premium against the April contract which expires Tuesday afternoon. The international crude benchmark Brent contract for May delivery gained to $73.79 bbl, adding $0.82. NYMEX RBOB April futures advanced $0.0345 to $2.5360 gallon and the front-month ULSD contract settled the session with a modest gain at $2.6871 gallon.

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