DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange softened in early trading Tuesday as investors positioned ahead of the beginning of a two-day policy meeting by the Federal Open Market Committee that is expected to deliver yet another quarter percentage point rate increase amid stubbornly high inflation and continued strength in the labor market.

The rate hike itself is unlikely to move financial markets much, with over 96% of investors anticipating the FOMC to raise the federal funds rate to above 5% on Wednesday, according to CME Fed Watch Tool. However, the language of the FOMC policy statement and the follow-up conference from Fed Chairman Jerome Powell could be a major catalyst.

Powell will likely signal interest rates would have to remain at elevated levels for an extended period and push back against market pricing of any rate cuts this year. Assuming the Fed raises rates by 0.25 percentage points this week, the market is currently pricing in a 34.6% chance of another rate hike in June and a 6.8% chance of a rate cut in June. The continued strength of the labor market and slower-than-expected moderation in inflation underscores the case for the Fed to continue raising interest rates to make sure inflation is indeed moving down to its 2% target. On the other hand, recent macroeconomic data showed the economy is clearly slowing at a sharp rate, down to just 1.1% for the first quarter from 2.6% in the final three months of 2022. For context, economists have expected US GDP growth to top 2% at the start of the year.

Monday's economic data showed manufacturing sectors in the U.S. and China fell into contraction last month, reflecting depressed activity amid higher borrowing costs and trade tensions. In China, the manufacturing index fell into negative territory for the first time since the post-pandemic reopening late last year, while the expansion of the services sector also slowed.

The decline in factory activity was mainly due to "insufficient market demand and the high base effect of a rapid recovery in manufacturing in the first quarter", according to Zhao Qinghe, a senior economist with China's National Bureau of Statistics.

However, even the non-manufacturing index of activity in services and construction also softened to 56.4 from 58.2 in March but still showed an expansion.

In its first official economic assessment since new leadership took over, Beijing said economic growth had got off to a good start, but also noted there are risks threatening the sustainability of the recovery.

"The current economic improvement is mainly owing to recovery-driven growth, but the internal driving force is not strong, and demand is still insufficient," said a statement on Friday wrapping up a meeting of the Politburo, the ruling Communist Party's top decision-making body. The uneven growth in China doesn't bode well for a bullish view on global oil demand this year that has been supported by expectations for China's post-COVID rebound. The International Energy Agency forecast world oil consumption will climb by 2 million barrels per day (bpd) in 2023 to a record 101.9 million bpd, buoyed by a resurgent China which will account for 90% of that growth. Despite these forecasts, diesel and gasoline markets in Asia have weakened significantly over the past month, with some refiners in the region cutting run rates as margins shrink and China's exports of refined products surge amid weak domestic demand.

Near 7:45 a.m. EDT, NYMEX June West Texas Intermediate futures softened to $75.46 barrel (bbl), while the international crude benchmark ICE Brent for July delivery traded little changed near $79.15 bbl. NYMEX June RBOB futures retreated $0.0096 to $2.5408 gallon, and June ULSD futures edged lower to $2.3781 gallon.