DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange powered higher in the pre-inventory report session Wednesday after the American Petroleum Institute survey showed a larger-than-expected drop in U.S. gasoline and distillate fuel supplies during the final week of October as investors in financial markets positioned ahead of the rate decision from the Federal Open Market Committee that concludes a two-day policy meeting Wednesday afternoon.

Wednesday morning's move higher in the oil complex comes despite a continued rally in the U.S. dollar that extended gains into the second consecutive session Wednesday, trading near a four-week high of 106.740 against the basket of foreign currencies. Oil prices and the greenback typically have an inverse relationship as a stronger dollar makes buying oil priced in U.S. currency more expensive for foreign buyers. Market participants are now bracing for the FOMC's monetary policy announcement scheduled for 2 p.m. EDT, followed by a press-conference with the Fed's Chairman Jerome Powell 30 minutes later. The central bank is widely expected to keep the federal funds rate unchanged, but continued strength in the labor market alongside accelerating inflation across pockets of the economy prompted some policy makers to call for one more rate hike before the end of the year. The Committee made it abundantly clear the strength of the economy coupled with rising energy prices could very well push headline inflation higher, triggering more aggressive policy moves from the central bank. As such, investors are more likely to react to the comments from Powell about the outlook for monetary policy than the rate decision itself.

The U.S. dollar only briefly came under selling pressure after Eurozone inflation fell more than expected in October, down 1.4% to a 2.9% annualized rate, according to data published by Eurostat. The decline in headline inflation was mainly attributed to a retreat in energy and food prices along with prices for services and non-energy industrial goods.

However, easing inflation mostly came on the back of deteriorating economic growth that fell to a negative 0.1% across the Eurozone for the third quarter. Europe's largest economy, Germany, recorded a negative growth figure for the second consecutive quarter, meaning its economy is now in a technical recession. A combination of easing inflation and slowing growth might suggest the European Central Bank's tough medicine of tight monetary policy finally produced the desired effect. Economists expect Eurozone inflation and business activity will slow further in the coming months due to the delayed impact of rate hikes.

Separately, The American Petroleum Institute survey published late Tuesday detailed a larger-than-expected build in U.S. commercial crude-oil supplies along with a sizable drop in gasoline and distillate fuel inventories. Further details of the report showed crude supply rose 1.347 million barrels (bbl) last week, more than twice an expected 500,000-bbl gain. Supply at Cushing, Oklahoma, the New York Mercantile Exchange delivery point for West Texas Intermediate futures, added 375,000 bbl. Gasoline inventory declined 357,000 bbl last week versus calls for a draw of 500,000 bbl. API data show distillate supply fell 2.484 million bbl, above an expected 1.9 million bbl drop.

Next, oil traders are waiting for the official data from the U.S. Energy Information Administration scheduled for 10:30 a.m. EDT release.

Near 8:15 a.m. EDT, West Texas Intermediate December futures on NYMEX advanced $1.75 bbl to near $82.76 bbl, while the new front-month Brent January contract on ICE spiked $1.64 bbl to $86.65 bbl. NYMEX December ULSD futures moved $0.0453 higher to $2.9536 gallon, with the December RBOB contract trading $0.0409 higher near $2.2579 gallon.

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