DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange declined on Monday, with West Texas Intermediate as much as 2% lower after New York manufacturing activity unexpectedly strengthened in April, lifting odds for two more rate hikes by the Federal Open Market Committee.

Manufacturing business activity increased in New York State for the first time in five months, according to firms responding to the April Empire State Manufacturing Survey conducted by the New York Federal Reserve Bank. Headline business conditions index shot up 35 points to 10.8. The new orders index rose a whopping 47 points to 25.1, and the shipments index climbed 37 points to 23.9, indicating that both orders and shipments increased substantially after declining in recent months.

The fresh data suggests the economy along with underlying inflation remain strong, paving the way for more interest rate increases from the FOMC at their next two meetings. Over 88% of investors now anticipate central bank policymakers will raise the federal funds rate 25-basis points on May 3, with odds rising for yet another 25-point rate hike at the FOMC's June meeting.

Richmond Federal Reserve Bank President Thomas Barkin said this afternoon that he wants to see more evidence that inflation is easing back to the central bank's goal of 2%.

"Our economy works just fine with rates at this level," said Barkin in an audience discussion at the Richmond Association for Business Economics Monday.

The persistent strength of U.S. labor market has surprised economists and policymakers but put pressure on the Fed to keep raising rates. Fed officials who spoke last week underscored the complicated task of cooling inflation without damaging the broader economy.

Supporting the view that the fight against inflation is far from over, the national average gasoline prices climbed to $3.65 as of Monday, rising for three consecutive weeks. West Texas Intermediate futures rallied above $80 per barrel (bbl) last week, hitting their highest level of the year.

Against the macroeconomic outlook, OPEC+ earlier this month announced they would cut production quotas. International Energy Agency and Organization of the Petroleum Exporting Countries last week both forecast global oil market would likely slide into deeper deficit in response to the OPEC+ production cuts announced April 2.

"Our oil market balances were already set to tighten in the second half of 2023, with the potential for a substantial supply deficit to emerge," said IEA in response to the OPEC+ decision.

Global oil demand is seen climbing by about 2 million barrels per day (bpd) this year to a record 101.9 million bpd, with 90% of that growth realized in developing and emerging economies led by China, said IEA in its Oil Market Report on Friday (4/14).

Despite a sizable fall in fuel consumption across advanced economies in the first quarter, a solid rebound in China's fuel consumption lifted worldwide demand 810,000 bpd above the year-ago consumption rate to 100.4 million bpd, said IEA. The agency expects a further increase in global oil demand growth to 2.7 million bpd through year-end, propelled by a continued recovery in Asia.

For advanced economies, IEA acknowledged weakness in industrial activity is impacting diesel demand, whereas the services sector and personal consumption are driving gasoline and jet uptake.

"Consumers confronted by inflated prices for basic necessities will now have to spread their budgets even more thinly. This augurs badly for the economic recovery and growth," said the IEA.

At settlement, WTI futures for May delivery declined $1.69 to $80.83 bbl and international crude benchmark Brent for June delivery fell to $84.76 bbl, down $1.55 bbl. NYMEX May RBOB futures declined $0.0619 to $2.7740 gallon, while the May ULSD contract fell $0.0245 to $2.6147 gallon.

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