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Oil Dips as Fed Signals Heavy Tightening; U.S. Inventories Awaited


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By Barani Krishnan — Crude prices fell at Tuesday’s close as Federal Reserve Governor Lael Brainard short-circuited oil bulls’ attempts to rally the market for a second day in a row with her speech about how the central bank intended to bring inflation back to its target with strong rate tightening if necessary.

Smaller forecasts of crude and fuel inventory drawdowns for last week also impacted sentiment.

London-traded Brent, the global oil benchmark, settled down 89 cents, or 0.8%, at $106.64 per barrel. It had risen 4% earlier in the day to reach almost $110 as oil bulls attempted to add to Monday’s 2% gain.

For context, Brent fell 13% last week for its biggest weekly decline since April 2020 after finishing the first quarter up 39%, demonstrating the recent volatility in oil.

New York-traded U.S. crude benchmark West Texas Intermediate, or WTI, settled down $1.32, or 1.3%, at $101.96, after an intraday peak of $105.59.

WTI settled below the key $100 support last week as it fell about 13%, just like Brent, for its worst week since April 2020. That came despite a 33% rally in the first quarter.

“The trend in recent weeks has broadly been one of consolidation, albeit following an extremely volatile period and what we’ve seen so far this week doesn’t suggest anything has changed.

Tuesday’s reversal in crude came after Brainard, who is awaiting confirmation as Fed Vice Chair, vowed to bring inflation, which grew 6.4% in the 12 months to February, according to the central bank’s closely-watched Personal Consumption Expenditure Index, to the ”neutral” target of 2% later this year.

“The combined impact of rate hikes and balance-sheet reductions will move monetary policy closer to neutral later this year,” Brainard said in a speech on inflation expectations. “Inflation is too high. High inflation burdens all Americans. Lowering inflation is our most essential duty. We must also sustain the recovery to include everyone.”

The central bank approved its first pandemic-era rate hike on March 16, raising rates by 25 basis points, or a quarter percentage point. Many of its policy-makers have said since that the March hike was too tame and more aggressive increases of 50 basis points, or half percentage point, may be needed. The central bank is considering as many as seven rate adjustments this year.

Aside from keeping rates at almost zero for two years prior to its March rate hike, the Fed purchased $120 billion worth of bonds and assets for each month during that period to support the economy. Those asset purchases and others have added some $4 trillion to the central bank’s so-called balance sheet, which now stands at around $8.5 trillion. Fed officials also hope to trim that figure significantly.

“I expect the balance sheet to shrink much faster than in prior recovery,” Brainard said. “After policy becomes more neutral, the extent of additional tightening will be determined by the changing inflation and employment outlooks.”

Stocks on Wall Street, which trended higher earlier in the day, tumbled on Brainard’s remarks, pulling oil prices down as well. With an hour to the close, the S&P 500 was down 1% on the day.

Oil traders were also wary about U.S. weekly oil inventory data, due after market settlement from the American Petroleum Institute, or API.

The API will release at approximately 4:30 PM ET (20:30 GMT) a snapshot of closing balances on U.S. crude, gasoline and distillates for the week ended April 1. The numbers serve as a precursor to official inventory data on the same due from the U.S. Energy Information Administration on Wednesday.

For last week, analysts tracked by expect the EIA to report a crude stockpile draw of 2.06 million barrels, on top of the 3.45-million barrel reduction reported during the week to March 25.

On the gasoline inventory front, the consensus is for a build of 63,000 barrels over the 785,000-barrel build in the previous week.

With distillate stockpiles, the expectation is for a drop of 819,000 barrels versus the prior week’s build of 1.39 million.

Oil Dips as Fed Signals Heavy Tightening; U.S. Inventories Awaited

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