Oil dips on US debt deal concerns

Oil prices dipped on Tuesday, with WTI briefly testing the $73.9 per barrel support level before paring some of the day's losses. If the WTI price declines, it may encounter support near $73.9 per barrel, while resistance may be found near $74.6 per barrel.

Oil prices have been under pressure, as mounting economic risks reduce the outlook for oil demand. The looming 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 announced over the weekend that they have reached a tentative agreement to suspend the federal government's debt ceiling. The deal, however, will have to pass through Congress before the US runs out of resources to meet its obligations. The deal to increase the debt ceiling will be presented to the US Congress on Wednesday. US lawmakers will be called to assess the deal with little time to spare. Lingering concerns about a US debt default are causing economic uncertainty, pushing oil prices down.

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.

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. 

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Written by:
Myrsini Giannouli

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