Oil rallies on increased demand expectations

Oil prices rallied on Thursday, with the WTI price touching $71 per barrel. If the WTI price declines, it may encounter support near $70 per barrel again, while resistance may be found near $74.6 per barrel.

Increased oil demand expectations boosted oil prices on Thursday on expectations of a pause in US interest rate hikes and the passing of the U.S. debt ceiling bill.

The US debt crisis is affecting, not only the dollar, but most assets and commodities, including oil. US Treasury Secretary Janet Yellen has warned that the office will not meet all US government obligations by June 5th. This would force the country to default on its debt, leading to a major recession. 

US President Joe Biden and Republican House Speaker Kevin McCarthy have been negotiating a deal that would raise the government's debt limit, preventing the US from going into default. The two parties have reached an agreement to suspend the federal government's $31.4 trillion debt ceiling. The deal, however, will have to be approved by Congress before the US runs out of resources to meet its obligations. The deal passed the House of Representatives by a strong vote of 314–117 and was sent to the US Senate for approval. Senators are racing to pass the debt limit bill as the threat of default looms. US lawmakers will be called to assess the deal with little time to spare. Lingering concerns of a US debt default are causing economic uncertainty, pushing oil prices down.

Oil prices are boosted by diminishing rate hike expectations. US Federal Reserve Chair Jerome Powell indicated that the US Central Bank may pivot in a more dovish direction. The Federal Reserve raised interest rates by 25 basis points at its latest monetary policy meeting, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%. The US Central Bank has signaled that its hawkish policy is coming to an end, providing support for oil prices. As major central banks are winding down their hiking cycles, the oil demand outlook rises. 

Weak economic data for China pushed oil prices down this week. The Chinese manufacturing PMI dropped to its lowest level for 2023 of 48.8 against the 49.5 anticipated, indicating that the manufacturing sector in China is contracting. Services PMI came in at 54.5, against the 55.2 forecasts, registering the slowest growth in the past four months. China is the world’s largest energy importer, and the fragile state of the country’s economy is limiting the outlook for oil demand.

Oil prices are supported by limited supply, as OPEC+ producers recently decided to reduce output by 1.1 million barrels per day, to offset the drop in oil prices from the global banking crisis. Last week, conflicting statements from OPEC members caused volatility in oil prices ahead of the OPEC+ meeting on June 4th. Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, warned traders against shorting oil futures, fueling speculation on further production cuts. Russian Deputy Prime Minister Alexander Novak, however, downplayed the prospect of further OPEC+ production cuts at next week’s meeting. Iranian President Ebrahim Raisi attempted to quell rumors of further production cuts, stating that he hopes oil producers can calm down the market and calling for unity amongst OPEC members.

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Written by:
Myrsini Giannouli

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