Oil Futures Slump as Interest Rates Seen Higher for Longer

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

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange West Texas Intermediate futures and the Brent contract on the Intercontinental Exchange settled lower for the fourth straight session Thursday, sliding to 13-week and 14-week lows, respectively, while the U.S. dollar strengthened to a 10-day high, as markets see the likelihood of lower interest rates later this year dissipating.

The crude contracts accelerated losses as the U.S. dollar gained with expectations moving from two 25-basis point cuts in the federal funds rate to one, and just barely, as central bankers voiced reluctance in easing monetary policy too soon. Minutes from the Federal Open Market Committee's April 30-May 1 meeting noted progress in lowering inflation slowed in the first quarter, with some officials "emphasiz(ing) that the recent increases in inflation had been relatively broad based and therefore should not be overly discounted."

They also "remained concerned that elevated inflation continued to harm the purchasing power of households, especially those least able to meet the higher costs of essentials like food, housing, and transportation."

CME's FedWatch Tool still shows expectations for a 25-basis point cut in the federal funds rate in September but with a 51.1% probability. That's down from a 57.5% probability on Wednesday and a 67.6% probability a week ago on May 16. The federal funds rate is currently in a 5.25% by 5.5% target range.

The U.S. dollar index strengthened 0.2% to 105.036 in trading against a basket of foreign currencies, advancing for a fifth straight session.

Higher for longer interest rates slow economic growth, with a sluggish economy using less energy. Amid a week of limited economic data, the Federal Reserve Bank of Kansas City today released their Manufacturing Survey for May showing "essentially unchanged" activity this month.

"Our business has slowed down but returns every now and then, and it's hard to anticipate," said a manufacturer in the Tenth District surveyed by the bank. "Things are slowing down a little more than we would like," said another.

Both WTI and Brent futures settled below their 50% Fibonacci retracement points for their December-April uptrends for the second session Thursday, with July WTI settling at $76.87 bbl, down $0.70, and July Brent ending the session with a $0.54 loss at $81.36 bbl.

Oil product futures ended mixed, with June RBOB reversing off a one-week low to settle flat at $2.4694 gallon and ULSD pared a decline to a $2.4009 one-week low to settle down $0.02 at $2.4118 gallon.

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

Brian Milne