Oil Futures Shallowly Mixed Shead of Fed Decision on Rates

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange were shallowly mixed early Wednesday ahead of weekly government statistics on changes in oil inventories and the afternoon decision by the Federal Open Market Committee on interest rates.

An overwhelming majority expect FOMC to hike the federal funds rate 25 basis points to a 4.75% by 5% target range, according to the CME FedWatch Tool, as the central bank continues to fight inflation, which has proved to be stubbornly high. The Bureau of Labor Statistics last reported the Consumer Price Index 6% above year ago in February, and the Bureau of Economic Analysis said Personal Consumption Expenditures, the Federal Reserve's preferred inflation indicator, increased 5.4% year-on-year in January. Both readings on inflation are well above the Fed's 2% target. In December 2022, the Fed expected a 3.1% PCE reading for 2023.

The failures of Silicon Valley Bank and Signature Bank earlier this month prompted howls, including from some lawmakers, for the Fed to halt further rate hikes. The root cause of SVB's failure was interest rate mismanagement, which came to light as the midsized bank was forced to sell longer duration fixed-income assets at a loss to cover massive withdrawals by customers, many of which were venture capitalists funding startups. Joined by an effort to sell stock, depositors were spooked, triggering a bank run. The U.S. Treasury subsequently shut Signature Bank in New York, one of the few banks serving crypto exchanges.

Fears of contagion in the banking sector, including comparison to the Great Financial Crisis of 2008, triggered heaving selling in commodities, while the U.S. Dollar Index is down for a fifth consecutive session early Wednesday, trading near 102.7 against a basket of foreign currencies. On March 8, the dollar reached a more than three-month high at 105.87 on expectations for the Fed to continue to raise rates.

Late Tuesday, the Commodity Futures Trading Commission released its Commitment of Traders report for March 14 showing speculators cut a long position in West Texas Intermediate futures by 14.8% that reduced length by the noncommercial trading group to its smallest position since October 2012 at 176,219 contracts.

Guarantees by the Fed, U.S. Treasury, and Federal Deposit Insurance Corporation that depositors would still be able to withdraw their money even if above the $250,000 FDIC insured amount eased jitters. On Tuesday, the Wall Street Journal reported Jamie Dimon, CEO of JPMorgan Chase, was leading rescue talks with other banks to shore up First Republic Bank, further calming markets.

CME FedWatch Tool shows a 66.5% probability for another 25-basis-point hike in the federal funds rate to a 5% to 5.25% target range during the FOMC's May 2-3 meeting. The indicator then sees no rate hike in June, and for the central bank to then cut the key overnight bank borrowing rate by 25 basis points in July.

Ahead of the FOMC decision at 2 p.m. EDT, the Energy Information Administration at 10:30 a.m. EDT will release its inventory report for the week ended March 17.

Late Tuesday, American Petroleum Institute reported a 3.262-million-barrel (bbl) build in commercial crude oil stocks took place last week, missing expectations for a 1.5 million bbl draw. API said gasoline inventory fell 1.09 million bbl through the week ended March 17, slightly less than estimates for a 1.4-million-bbl draw. For distillates, API reported a 1.84-million-bbl decline in inventory that was above expectations for a 1.3-million-bbl drawdown.

May West Texas Intermediate futures on NYMEX was down about $0.20 at $69.45 bbl at 7:45 a.m. EDT, as it moves into the front-month position following Tuesday's expiration by the April contract at $69.33 bbl. The front end of WTI's forward curve is in a small contango following a heavy refinery maintenance season that diminished refiner demand for crude oil.

ICE May Brent futures, the international price benchmark for crude oil, was $0.35 lower, trading just below $75 bbl. On Monday, Brent traded at a $70.12-bbl 15-month low on the spot continuous chart.

NYMEX April RBOB futures were down $0.0064 at $2.5325 gallon, with the April ULSD contract $0.0157 higher at $2.7059 gallon.

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

Brian Milne