Minimal Gains for Crude as Debt Ceiling Deal Meets Rate Hike Fears

by Ship & Bunker News Team
Monday May 29, 2023

The overly familiar phenomenon of erratic trading led on Monday to two key crude benchmarks eking out minimal gains in the face of investors who are still fixated on the potential for bank rate hikes to curb energy demand.

Following the weekend's news that U.S. president Joe Biden and House of Representatives speaker Kevin McCarthy agreed to suspend the $31.4 trillion debt ceiling and cap government spending for the next two years, West Texas Intermediate rose 25 cents to $72.92 per barrel.

Brent settled up 12 cents to $77.07 per barrel.

But the aftereffect of Washington's agreement was far more muted than many analysts - who had obsessed over the debt ceiling for the better part of a week - had expected.

Liquidity Energy stated in a note, "The euphoria of the debt deal is wearing off as concern mounts for another rate hike by the Fed in June."

Bart Melek, global head of commodity strategy at TD Securities, added that the agreement "reduces the risk of a significant crash," but "the outcome was pretty much priced in"; also, the agreement called for reduced spending, making it "flat to modestly negative for demand."

As for the U.S. Federal Reserve, according to CME's FedWatch Tool markets believe it's a 50-50 chance that it will raise rates by another 25 basis points at its June 13 meeting; this is in stark contrast to the 8.3 percent chance predicted in April.

Even though the rate hikes have done little to dent demand, they have done considerable damage to bullish sentiment: oil is about 9 percent lower this year due to disappointment over China's economic recovery and the Fed's aggressive monetary tightening.

A rare voice of optimism was heard on Monday coming from finance writer Alex Kimani, who stated in that "Over the past couple of days, WTI prices have been struggling with the 50-Day EMA; however, optimism about a new debt ceiling deal being reached can lead to prices breaking above and rally to the $75 level, perhaps even as high as $79 where the 200-Day EMA is racing toward."