DTN Oil

WASHINGTON, D.C. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange registered losses in the afternoon session Wednesday amid a one-two punch of building crude oil inventories in the United States joined with a hawkish message from the Federal Reserve that signaled more interest rate hikes on the horizon this year amid persistently high core inflation.

The Federal Open Market Committee made no change to its benchmark federal funds rate at the conclusion of a two-day policy meeting on Wednesday, leaving the overnight bank borrowing rate in a 5% to 5.25% target range, as was broadly expected by markets. However, markets were caught off guard by the precipitous rise in the Fed's dot plot that showed a median of policymakers expect the federal funds rate to reach 5.6% at year end. That would imply two more rate hikes during the second half of 2023.

"We have covered a lot of ground and full effects of tightening have not yet been felt," said Federal Reserve Chairman Jerome Powell this afternoon at a news conference following the two-day meeting. "Looking ahead, nearly all policymakers view some further rate hikes this year will be appropriate."

CME FedWatch Tool shows 65% of investors see the Federal Reserve raising the key rate by another 0.25% during the July 26 FOMC meeting, which would be followed by a prolonged pause through the end of the year. The CME tool shows that the first cut in the federal funds rate is not expected until January 2024.

Powell stressed that persistently high inflation in the core services is a priority for the central bank despite a marked improvement in the headline Consumer Price Index.

"We see only earliest signs of core services disinflation. The key to non-housing services disinflation is to get loosening in labor market conditions," said Powell.

In its Summary of Projections, the FOMC revised higher its core CPI projections to 3.9% from March's 3.6% even as headline CPI is now seen at 3.2% by year end. U.S. Gross Domestic Product was also revised higher to 1% this year from 0.4% seen in March amid a strong labor market, with the unemployment rate revised lower to 4.1% this year from 4.5%.

Stocks on Wall Street nosedived, with Dow Jones Industrials losing 232 points, closing at 33,979, and the U.S. dollar index trimmed earlier losses to settle the session at 102.916 against a basket of foreign currencies.

NYMEX West Texas Intermediate July futures dropped back $1.15 to $68.27 bbl, while the August Brent contract declined $1.09 to $73.20 bbl. NYMEX RBOB July futures slipped $0.0033 gallon to $2.5546 gallon and ULSD July futures fell to $2.3577 gallon, down $0.0378 on the session.

Underlying losses for the oil complex, U.S. Energy Information Administration said in its weekly inventory report released this morning domestic crude oil inventory jumped by 7.9 million bbl during the week-ended June 9, missing calls for a 300,000-bbl decrease. The outsized build was accompanied by a 4.2 million bbl increase in product inventories as domestic refiners scaled back run rates and demand for middle distillates slid to the second lowest rate this year.

In the reviewed week, U.S. refining run rate unexpectedly dropped by 2.1% from the previous week to a 93.7% utilization rate. It was the sharpest weekly decline of the year and compared with expectations for no change from the previous week. Further adding to the bearishness of the report, EIA boosted its adjustment factor by nearly 2 million bpd, adding back 13.56 million bbl of missing supply, likely the result of the EIA underestimating oil production and overestimating crude exports.

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