DTN Oil

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange (NYMEX) and Brent on the Intercontinental Exchange (ICE) ended down Monday, but off session lows, as markets unwound some of the geopolitical risk premium in crude oil prices bid up ahead of the weekend while a resilient U.S. economy is seen delaying interest rate cuts.

A sense of uneasy calmness that a broader war in the Middle East might be averted after Israel has so far not retaliated against Iran for Tehran's direct attack over the weekend pressured the international and U.S. crude benchmarks that had rallied to six-month highs on April 12. The attack was expected with Tehran indicating it was in retaliation for the April 1 strike on its consulate in Damascus that killed several military leaders of the Islamic Revolutionary Guard Corps including two generals. Tehran said it considered the matter closed and Israeli allies, including the U.S., counseled Tel Aviv not to retaliate. Any Israeli response should it occur is not expected to target Iranian oil infrastructure.

ICE June Brent settled down $0.35 at $90.10 a barrel (bbl) and NYMEX May West Texas Intermediate ended $0.25 lower at $85.41 bbl.

Domestically, investors again shifted their expectations for when the Federal Open Market Committee (FOMC) would cut the federal funds rate following a Monday morning report from the U.S. Census Bureau showing greater-than-expected U.S. retail sales in March. Sales increased 0.7% in March from an upwardly adjusted February reading to 0.9% while 3.6% above a year ago, indicating consumer spending remains robust. The macroeconomic data prompted the Federal Bank of Atlanta's GDPNow model to call for first-quarter U.S. GDP growth of 2.8%, up from 2.4% on April 10.

The retail sales report spurred a rally in the U.S. dollar to a 106.045 5-1/2 month high in index trading against a basket of foreign currencies, with the strong U.S. economy seen delaying interest rate relief by the Federal Reserve.

CME FedWatch Tool again finds most investors do not see a reduction in the federal funds rate until September, with a 51.3% probability FOMC will maintain the policy rate in a 5.25% by 5.5% target range at its July meeting, up from 43.5% on Friday.

Historically, consumer spending is tied to driving demand and strong economic growth to diesel fuel consumption. However, high interest rates for longer and the cumulative effect of inflation could prompt fewer road trips over the summer driving season while slowing recovery in manufacturing activity. The Federal Reserve of New York Monday morning in its Empire State Manufacturing survey said business activity in New York State continued to decline in early April, restraining demand for the middle-of-the-barrel fuel.

NYMEX May ULSD futures settled $0.0309 lower at $2.6542 gallon, while the May RBOB contract ended down $0.0109 at $2.7839 gallon. The gasoline contract rallied to a $2.8516 gallon seven-month high on a spot continuous basis on Friday.

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