Oil Futures Selloff as Fed Signals Another Rate Hike in Q4

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange fell Wednesday afternoon, selling off after the Federal Open Market Committee signaled one more 25-point increase in the federal funds rate in the fourth quarter, clashing with investor expectations.

Following their two-day meeting on monetary policy, FOMC maintained the federal funds rate in a 5.25% by 5.5% target range, which was widely expected, while communicating central bank officials are "strongly committed to returning inflation to its 2 percent objective."

Based on their median projection cited in their Summary of Economic Projections released Wednesday afternoon, they don't see the objective reached until 2026. Federal Reserve board members and bank presidents project core personal consumption expenditures, the Fed's preferred inflation index, for this year at 3.7%, and at 2.6% in 2024.

Where traders focused their attention was the appropriate policy path in lowering inflation, with Fed officials projecting a 5.6% federal funds rate for 2023, unchanged from June's projection. Eleven of the 18 FOMC officials expect they will vote to lift the federal funds rate 25 points at one of their two remaining meetings in 2023. Moreover, FOMC officials lifted their assumptions for what the federal funds rate would average in 2024, boosting projections from 4.6% in June to 5.1%. The latest projections reduce the number of expected cuts in the federal funds rate in 2024 from four to two, which runs contrary to investor expectations. The updated projections do align with repeated comments from Fed Chairman Jerome Powell and other central bank officials telegraphing rates would remain "higher for longer."

Higher interest rates are designed to slow economic growth, which typically leads to higher unemployment and lower oil consumption. Yet Fed officials boosted their assumptions for annualized gross domestic product growth for 2023 from 1% in June to 2.1% now, and by 0.4% to 1.5% in 2024. For their expectations for unemployment, they lowered their projection for the 2023 national unemployment rate from 4.1% in June to 3.8% now, and from 4.5% for 2024 to 4.1%, seeing a path for a "soft landing" following their monetary tightening cycle.

The Fed's outlook overshadowed bullish supply data released midmorning by the Energy Information Administration, with the Washington, D.C.-based agency reporting across-the-board weekly drawdowns for crude oil, gasoline, and distillates.

EIA reported a 2.1 million bbl drawdown in U.S. commercial crude inventory to 418.456 million bbl during the week ended of Sept. 15, 11.95 million bbl less than the five-year average. Nearly all the stock draw, 2.064 million bbl, was at the Cushing tank farm in Oklahoma, the delivery point for the West Texas Intermediate futures, where inventory fell to a 22.901 million bbl 14-month low.

Gasoline inventory was drawn down 831,000 bbl from an 11-week high to 219.476 million bbl during the week-ended Sept. 15, EIA data shows, with gasoline stocks 6.841 million bbl below the five-year average. Gasoline supplied to the U.S. market increased 103,000 bpd from a seven-month low to 8.41 million bpd, while the four-week average through Sept. 15 is 243,000 bpd or 2.8% above the comparable period in 2022 at 8.776 million bpd.

Distillate fuel inventory was drawn down 2.9 million bbl to 119.7 million bbl, widening a deficit against the five-year average to 20.871 million bbl or 14.9%. Implied demand for distillate surged 588,000 bpd to a 4.166 million bpd four-month high during the second week of September, boosting the four-week average through Sept. 15 to 3.828 million bpd, up 395,000 bpd or 11.5% against the same four weeks in 2022.

NYMEX October WTI futures expired down $0.92 but held above $90 bbl at $90.28 bbl, with the November contract settling at $89.66 bbl. ICE November Brent futures settled down $0.81 at $93.53 bbl.

NYMEX October ULSD futures settled Wednesday's session $0.0471 lower at $3.3268 gallon, and the October RBOB contract notched its fourth straight session loss with a settlement at $2.6192 gallon, down $0.0389.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne