Oil dips as rate hike bets offset US debt deal

Analysts see any boost in oil prices from debt deal as short-lived

By Reuters

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Published: Mon 29 May 2023, 9:31 PM

Oil prices slipped on Monday, as worries over further interest rate hikes that could curb energy demand trumped a tentative US debt ceiling deal that would avert a default by the world’s top oil consumer.

Brent crude futures slipped 23 cents, or 0.3 per cent, to $76.72 a barrel by 1640 GMT, while US West Texas Intermediate crude was flat at $72.67 a barrel.

Trade was subdued because of UK and US public holidays.

“The euphoria of the debt deal is wearing off as concern mounts for another rate hike by the Fed in June,” brokerage Liquidity Energy LLC wrote in a note.

US President Joe Biden and House of Representatives Speaker Kevin McCarthy over the weekend forged an agreement to suspend the $31.4 trillion debt ceiling and cap government spending for the next two years. Both leaders expressed confidence that members of the Democratic and Republican parties will support the deal.

Still, analysts saw any boost in oil prices from it as short-lived, with earlier gains in the session lost.

Markets are now pricing in a roughly 50-50 chance that the Fed raises rates by another 25 basis points at its June 13-14 meeting, up from an 8.3 per cent chance predicted a month ago, according to CME’s FedWatch Tool.

At its last policy meeting on May 2-3, the Federal Reserve signalled it was open to pausing its most aggressive rate-hiking cycle since the early 1980s in June. “Higher US rates are a headwind for crude oil demand,” IG Sydney-based analyst Tony Sycamore said.

The Organisation of the Petroleum Exporting Countries (Opec) and allies including Russia, known as Opec+, are due to meet on June 4.

Saudi Energy Minister Abdulaziz bin Salman warned short-sellers betting oil prices will fall to “watch out”, in a possible signal that Opec+ may further cut output.

However, comments from Russian oil officials and sources, including Deputy Prime Minister Alexander Novak, indicate the world’s third-largest oil producer is leaning towards leaving output unchanged.

“Traders have been left a little confused as to what we can expect,” said Craig Erlam, senior markets analyst at OANDA.

“It may be that Saudi Arabia wants to keep traders on their toes, but to make these comments and not follow through could be perceived as weak and see prices drift lower again,” Erlam said.

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