Market news
31.05.2023, 12:46

Oil price plummets on doubts over whether debt-ceiling deal will get enough votes

  • Oil price spirals lower as traders deleverage ahead of the key vote to decide whether the US should raise its debt limit.
  • A growing number of Republican Congressmen especially, have voiced their disapproval of the deal and said they intend to vote it down. 
  • Mixed messaging from key OPEC+ members ahead of the June 4 meeting adds to the uncertainty.

Oil price tumbles on Wednesday as doubts grow over whether the deal to raise the US debt ceiling will get voted through by Congress. A group of rebel Republicans and some Democrats too have warned they may vote against the deal. If it fails to pass and the US defaults on its obligations, financial chaos is expected, hitting Oil demand and lowering prices. That said, the US Dollar could also suffer – a positive for Oil, which is priced mainly in USD. Uncertainty over the outcome of OPEC+’s next meeting and mixed messaging from key members adds to the opaque outlook. 

At the time of writing, WTI Oil is trading in the upper $67s and Brent Crude Oil in the lower $72s.  

Oil news and market movers 

  • Oil price loses ground as investors question whether the tentative agreement to extend the debt limit, reached by President Joe Biden and Republican House Speaker Kevin McCarthy over the weekend, will win enough votes in Congress to pass into law.
  • The House of Representatives is expected to vote on the deal on Wednesday evening before it goes to the Senate for the final vote. 
  • Several House Republicans have voiced displeasure at the idea of increasing the country’s already gigantic debt pile. Some Democrats are also opposed to the bill because it cuts benefits. Democrat Congressman Richie Torres, for example, has criticized cuts to disability benefits.  
  • Expectations that an eleventh-hour agreement will be reached on the debt ceiling as well as robust US macroeconomic data have increased market expectations that the Federal Reserve (Fed) will have to raise interest rates to combat rising inflation expectations – bullish for the US Dollar; bearish for Oil.  
  • At the time of writing, the CME FedWatch tool shows the odds continue to favor (by around 60%) the Fed raising interest rates by 0.25% at their meeting on June 14.  
  • Oil traders await the outcome of the next OPEC+ meeting on June 4, when the possibility of production cuts has been mooted.  
  • Two of OPEC+’s largest members, however, seem to be giving divergent messages over what might be decided. 
  • Saudi Oil Minister Prince Abdulaziz bin Salman seemed to imply OPEC+ might cut production quotas last Tuesday, May 24, when he warned speculators (interpreted as short-sellers) to “watch out”, and expressed support for OPEC’s October decision to cut supply. 
  • On the other hand, Russia’s Energy Minister Alexander Novak, played down the idea of production cuts, saying “I don't think that there will be any new steps, because just a month ago certain decisions were made regarding the voluntary reduction of oil production by some countries.” 


Crude Oil Technical Analysis: Price falls back in line with long-term downtrend

WTI Oil price paints more red on the charts as it falls back in line with the dominant downtrend, which has made successive lower lows since July 2022. As the old adage goes, “the trend is your friend until the bend at the end,” which given it is bearish favors short sellers. WTI Oil is trading below all the major daily and weekly Simple Moving Averages (SMAs) and is now also testing the 200-week SMA at $66.90. 


WTI US Oil: Weekly Chart

The potentially bullish right-angled triangle, which formed during May and is shown by the dotted lines on the daily chart below, failed to breakout higher and instead broke lower. 

WTI US Oil: Daily Chart

Oil price has decisively broken below the May 22 lows of $70.65 as well as the $69.40 May 15 lows. Only the 200-week SMA now stands in the way of further losses. If it breaks too, it could lead to further weakness down to the year-to-date (YTD) lows of $64.31. 

A break below the YTD lows would reignite the downtrend, with the next target at around $62.00, where trough lows from 2021 will come into play, followed by support at $57.50.

Oil price needs to climb back above the $74.70 May 24 highs to raise doubts about the dominant bearish trend. 

Such a break might lead to a potential target in the $79.70s, which roughly coincides with the 200-day SMA and the main trendline for the bear market, heightening its importance as a key resistance level. 

The long hammer Japanese candlestick pattern that formed at the May 4 (and YTD) lows is a sign that Oil price may have formed a strategic bottom at that level. 
 

WTI Oil FAQs

What is WTI Oil?

WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.

What factors drive the price of WTI Oil?

Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.

How does inventory data impact the price of WTI Oil

The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.

How does OPEC influence the price of WTI Oil?

OPEC (Organization of the Petroleum Exporting Countries) is a group of 13 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.

 

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