Oil Plunges 4% on Hawkish Central Banks, USD Gains

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON, D.C. (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled Thursday's session with steep losses, with the international crude benchmark pressured below $75 bbl after the Bank of England and Norwegian Central Bank among others sharply raised interest rates to fight relentless inflation, signaling central banks are not seeing sufficient progress in slowing rising consumer prices.

The United Kingdom, the world's sixth largest economy, is largely seen in recession this year after BOE shocked markets with another 50-basis point rate hike on Thursday, a further blow to homeowners struggling with skyrocketing mortgages.

"We took this decision today because unfortunately inflation is still way too high. Recent data have shown us that further decisive action is needed. Many people with mortgages and loans are now rightfully worried about what it means for them. But if we don't raise rates right now, higher inflation will stay with us for longer," said BOE Governor Andrew Bailey.

Inflation in the UK remained stuck last month at 8.7%, with prices paid for recreation and cultural activities rising at a faster pace than in April and, although food inflation eased, it remained in a double-digit vicinity at more than 18%.

What's more, inflation in the United States appears to have infected the labor market and wage-setting to a greater extent than elsewhere, with average earnings rising at a faster pace over the past three months even as payrolls are falling. This doesn't bode well for other central banks that are struggling with second-round effects of rising consumer prices in the service sector and high energy costs in Europe.

Norway's central bank and Swiss National Bank also raised interest rates on Thursday while signaling more tightening is needed to bring inflation under control.

Against this background, Federal Reserve Chairman Jerome Powell concluded the second day of Congressional testimony on Thursday where he reiterated that the central bank is aiming for a higher terminal rate at the end of the current tightening cycle, albeit, ready to go slower than in prior months. Powell reiterated that the pace and the extent of rate increases are two separate variables for the central bank that continues to be data-dependent in setting rate policy.

The Fed last week left the federal funds rate unchanged in a 5% to 5.25% target range but indicated that more rate hikes are likely needed before the end of the year to cool excessive demand.

Separately, the weekly U.S. inventory report released by the U.S. Energy Information Administration late morning was mixed-to-bearish, showing refined fuel stocks jumped even as refiners pulled back on runs.

U.S. refiners scaled back run rates for the second straight week through June 16 to 93.1% of capacity, down 0.6% from the prior week. U.S. refiners processed 16.5 million bpd of crude oil, which was 116,000 bpd less than the previous week.

In the gasoline complex, commercial inventories rose by 479,000 bbl to 221.4 million bbl compared with analyst expectations for a 500,000 bbl decrease. Demand for gasoline gained 182,000 bpd to 9.379 million bpd, bringing the four-week average consumption rate to 9.2 million bpd, up 3.1% from the same period last year.

Diesel stockpiles, meanwhile, built by 434,000 bbl to 114.3 million bbl, and are now about 15% below the five-year average, the EIA said. Analysts expected distillate inventories rose 600,000 bbl last week.

At settlement, NYMEX August West Texas Intermediate futures declined to $69.51 bbl, down $3.02 on the session, and international crude benchmark Brent for August delivery retreated $2.98 to $74.14 bbl. NYMEX July ULSD futures pulled back $0.0987 to $2.4655 gallon and NYMEX July RBOB futures dropped $0.0740 to $2.5501 gallon.

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

Liubov Georges