DTN Oil

WASHINGTON (DTN) -- Reversing an earlier advance, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange followed equity markets lower in Tuesday's afternoon session, pressured by a surging U.S. dollar as investors pared back bets for near-term rate cuts from the Federal Reserve.

At a Brookings Institute event in Washington, D.C., Federal Reserve Governor Christopher Waller cautioned that the central bank is "not rushed" to lower policy rates as has been the case in the prior rate cutting cycles.

"A strong economy gives us the flexibility to move methodically and carefully," said Waller.

U.S. economy dodged a recession in 2023 despite a slowing growth trajectory in the final months of the year. Meanwhile, the consumer price index eased from its peak of 9.1% seen in June 2022 to 3.5% at the end of 2023. Although still below the Fed's 2% target, the precipitous fall in inflationary pressures defied many forecasters over the course of 2023. The main concern for central bankers and market participants alike is not to ease monetary conditions too early and possibly reignite inflationary pressures.

Following Waller's remarks, investors trimmed bets for a 25-basis point March cut in the federal funds rate to 65% compared to 76% seen in the previous session. U.S. interest rates futures still price in a total of six 25-basis point rate cuts in 2024.

U.S. equities slumped at the start of the four-day trading week, with Dow Jones Industrial Average retreating 298 points and S&P 500 Index dropped back 0.5%. Meanwhile, the safe-heaven U.S. dollar surged 0.94% against a basket of foreign currencies to settle at a one-month high 103.112.

West Texas Intermediate for February delivery, the U.S. crude benchmark, slipped $0.28 bbl to settle at $72.40 bbl, and ICE March Brent nudged up $0.14 to settle the session at $78.29 bbl. NYMEX February RBOB futures firmed $0.0016 to $2.1219 gallon, and February ULSD futures slipped $0.0087 for a $2.6606 gallon settlement.

Earlier in the session, the crude complex found tepid support from flaring geopolitical tensions in the Middle East after Iran launched a series of ballistic missile attacks at a military base in northern Iraq. The attack took place near the U.S. consulate in the Iraqi city of Erbil, the capital of the semiautonomous region of Kurdistan. The latest attack highlights the ongoing risk of a broader conflict in the Middle East.

Iraq produced more than 4 million bpd or 4% of global oil at the end of 2023, according to estimates from the Organization of the Petroleum Exporting Countries, the second largest producer in the Middle East, behind Saudi Arabia with output at 9 million bpd.

While further escalation could inflame the region into a broader war in the oil-rich Middle East, to date, oil supply continues to flow through the Suez Canal-Red Sea corridor, the shortest transit route between Europe and Asia.

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