DTN Oil

WASHINGTON (DTN) -- Following a four-session rally, West Texas Intermediate futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange declined 1% Wednesday in reaction to inventory data from the U.S. Energy Information Administration showing domestic oil and petroleum product supplies fell less than expected last week, offsetting a surprise drop in domestic oil production.

EIA's inventory report released at midmorning offered a mixed bag of data for the oil complex, showing a small decline in total petroleum stocks along with disappointing fuel demand and a surprise drop in oil production during the third week of July. U.S. operators scaled back crude output to the lowest level so far this year at 12.2 million barrels per day (bpd), which is 900,000 bpd below the pre-pandemic high seen in March 2020. This falls in line with a declining rig count that fell a sixth consecutive week through July 21, according to the most recent data from Bakers Hughes. There are currently 530 active oil rigs in the United States, the lowest rig count since the week ended March 18, 2022.

Further details of the EIA report revealed commercial crude oil supplies declined by a smaller-than-expected 600,000 barrels (bbl) last week compared to expectations for a 2.2-million-bbl drawdown. At 456.8 million bbl, commercial stockpiles remained about 1% above the five-year average. The small decline in oil stockpiles was realized as refiners unexpectedly decreased crude throughput by 107,000 bpd in the reviewed week to 16.5 million bpd.

In the gasoline complex, commercial inventories also declined by a smaller-than-anticipated margin, down 786,000 bbl in the reviewed week to 217.6 million bpd, missing calls for a 1.7-million-bbl decrease. Demand for gasoline failed to improve markedly, averaging below 9 million bpd for the third straight week at 8.9 million bpd, a weak reading despite being midway through the peak driving season. Gasoline supplied to the U.S. market, a measure of demand, continues to trail the pre-pandemic level seen in 2019, averaging nearly 700,000 bpd or 7.3% below the comparable consumption rate during the first three weeks of July 2019.

In financial markets, the U.S. Dollar Index weakened, and equities gained after Federal Open Market Committee raised the benchmark interest rate by 0.25% this afternoon in a move widely expected by the market. This brought the federal funds rates to a range of 5.25% by 5.5%, the highest in 22 years.

While speaking during the news conference following the rate decision, Federal Reserve Chairman Jerome Powell said the central bank would take a "data-dependent" approach going forward when determining additional hikes, but it had a "long way to go" to get inflation back to the Fed's 2% goal.

"I would say it's certainly possible that we would raise [the federal funds rate] again at the September meeting if the data warranted," added Powell. "And I would also say it's possible that we would choose to hold steady and we're going to be making careful assessments, as I said, meeting by meeting."

The recent economic data might suggest the Fed's aggressive rate hikes over the past year have started to yield results, cooling aggregate demand and inflation that has eased from a 9.1% peak in July 2022 to just 3% last month. The disinflation happened even as national unemployment remained at a near 50-year low of 3.6%. The combination of ebbing inflation and tight labor market has been considered an anomaly by many economists, reflecting a longstanding theory that there is a tradeoff between jobs and holding prices steady. The Fed's own projections called for the unemployment rate to increase to 4.5%, meaning over one million people would have to lose their jobs to get prices under control.

"The economy is defying predictions that inflation would not fall absent of significant job destructions," said Lael Bainard, head of the National Economic Council, on July 12.

At settlement, WTI September futures declined $0.85 to settle at $78.78 bbl, and the international crude benchmark Brent contract slipped to $82.92 bbl, down $0.72 on the session. Oil products gained, with RBOB August futures on NYMEX adding $0.0539 to $2.9072 gallon and ULSD futures gained to $2.8429 gallon, up $0.0653.

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