Oil Wavers as USD Rallies on Powell's Hawkish Remarks

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Nearby-month delivery oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange swung between modest gains and losses on Friday as the U.S. dollar spiked to a fresh two-month high after Federal Reserve Chairman Jerome Powell signaled that the central bank is prepared to lift interest rates further and keep them at a restrictive level until inflation falls to its 2% target.

At the annual Symposium in Jackson Hole, Wyoming on Friday, Chair Powell sounded a hawkish tone when hitting all familiar talking points of inflation still being too high, the Fed's data dependency and above all its resolve to bring inflation down to the 2% target.

"As is often the case, we are navigating by the stars under cloudy skies... At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data," concluded Powell. Although headline inflation in the U.S. eased to 3.2% last month from its peak of 9.1% in June 2022, Powell warned that the risks of reacceleration are still embedded in the economy.

Unlike economies in the Eurozone and Asia, the strong labor market in the U.S. has supported personal consumption and aggregate demand, which is evident by the most recent retail sales data showing an increase of 0.7% - the largest gain since the beginning of the year.

With payroll and consumer spending trends remaining reasonably strong, the Fed's task now is to finetune monetary policy just right to keep pressure on inflation without causing undue stress on the economy along with job losses.

Following Powell's remarks, the U.S. dollar powered higher to finish the session above the 104 level, while limiting gains for the front-month West Texas Intermediate contract that settled the session up $0.78 at $79.83 bbl. The international crude benchmark Brent contract rallied $1.12 to $84.48 bbl. NYMEX ULSD futures spiked $0.1511 to $3.3075 gallon and NYMEX RBOB September futures added $0.0964 to settle at $2.8764 gallon.

Lending price support for products, Marathon Petroleum confirmed this afternoon that units closest to the storage tank fire at its 585,000 bpd Garyville, Louisiana refinery began the shutdown process this morning "out of an abundance of caution."

The fire occurred earlier after a naphtha release and prompted evacuation of residents within a one-mile radius of the part of the refinery impacted.

"As the fire-suppression efforts continue to progress, facility operations will continue to be evaluated with safety as our top priority," the emailed statement read.

Currently, the fire is under control and has remained within the common containment-dike area of two tanks on the refinery's property. Both tanks have sustained damage. Marathon Petroleum personnel and local emergency responders continue responding to the incident.

There will be an investigation conducted to determine the cause of the release.

Internationally, investors are assessing the potential for stronger production gains from marginal OPEC+ members, including Venezuela, Iran and Libya. Iranian crude exports have surged to 1.5 million bpd last month- the highest daily average since 2013, according to data intelligence firm Kpler. China, being an opportunistic buyer, has become a prime designation for sanctioned Iranian oil shipments.

Iran's oil production is estimated to have climbed above 3 million bpd in recent months, up from 2,500 bpd seen in 2022. Tehran produced more than 3.8 million bpd back in 2018 -- a year before the Trump Administration slapped harsh sanctions on Iranian oil exports.

In comparison, the Biden Administration has been rather lax about sanctions enforcement on Iran in an effort to lower oil prices in the aftermath of the Russian invasion of Ukraine in March 2022.

Additionally, the Biden Administration has reportedly drafted a proposal to lift oil sanctions on Venezuela in exchange for the restart of democratic processes in the Latin American country of 28 million. The preliminary talks reportedly involve senior officials from both nations, including Venezuela's head of congress, Jorge Rodríguez.

Sanctions on oil exports were imposed following Maduro's 2018 re-election, which many Western nations considered a sham.

Venezuela's oil production plunged to 450,000 bpd at its low in 2020 before recovering to about 800,000 bpd over the June-July period. Global Strategy at Citigroup forecasts Venezuela's oil production could climb to 1 million bpd by the end of the year.

Meanwhile, Turkey, Iraq and Kurdistan Regional Government (KRG) may have gotten closer this week to agreeing on a deal to restart a 970-km Kirkuk-Ceyhan Oil Pipeline than at any point since its shutdown in early March. The pipeline running from Iraq's northern region of Kurdistan to Turkey's Mediterranean port of Ceyhan remains operational and crude flows could start quickly once the deal is reached. Some 450,000 bpd of Iraqi oil exports from the northern region of Kurdistan have been shut following a legal dispute between Baghdad, Ankara, and Kurdistan regional government nearly six months ago. Such a prolonged disruption risks permanently damaging some of the producing wells in northern Kurdistan and already cost its government more than $2 billion, according to official figures released from the Kurdistan Regional Government. Although no deal has yet been announced, the potential to resume oil exports from Kurdistan by the year-end is quite potent.

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

Liubov Georges