Oil Plummets 5% On Prospect Of Washington Going Broke

Yet demand is still robust, according to U.S. inventory draws: File Image/Pixabay

Oil prices on Tuesday extended their losses with a huge nosedive of over 5 percent, after U.S. treasury secretary Janet Yellen said the U.S. government could run out of money within a month.

Yellen issued a stark warning to the U.S. Congress on Monday, suggesting a failure to raise or suspend the debt ceiling could result in the country's government running out of money by June 1. President Joe Biden has called a meeting of congressional leaders to discuss the debt ceiling on May 9.

This was in addition to investors awaiting the Federal Reserve's policy decision on interest rate hikes, which they feared could be another 25 basis points – something, in addition to expectations of the European Central Bank raising its rates on Thursday, that could ruin demand growth.

Brent fell $3.99, or 5.0 percent, to settle at $75.32 per barrel, while West Texas Intermediate fell $4.00, or 5.3 percent, to end at $71.66.

Tuesday's losses put both Brent and WTI in oversold territory and on track for their lowest closes since March 24.

Tamas Varga, analyst at broker PVM, said, "The unpredictable action of central banks in their mission to tame elevated consumer and producer prices, the rhetoric and action of consuming and producing nations have all cast a rather long shadow of doubt on prospects going forward."

Investors ignored news that the Organization of the Petroleum Exporting Countries' (OPEC) oil production fell in April due to a halt in some of Iraq's exports and delays to Nigeria shipments (down 190,000 barrels per day to 28.62 million bpd).

This caused Craig Erlam, a senior market analyst at Oanda, to say, "The post-OEPC+ gains have now been wiped out, which suggests traders are now of the belief that the economic outlook has deteriorated to the extent that the output cut won't create the deficit that was feared."

Still, Reuters provided further evidence of a market in which demand is still very much robust despite gloomy prognostications, via a poll showing that U.S. crude oil stockpiles likely declined about 1 million barrels last week.

If this proves to be the case (official Energy Information Administration data was due on Wednesday), it would mean inventories declined for a third week in a row for the first time since December.

In other oil related news on Tuesday, the latest data from the Ministry of Commerce and Industry showed that India paid $70.18 for every barrel of crude oil it purchased from Russia in March, down from $72.14 in February and $118 a year earlier.

Imports from Iraq, India's second largest supplier, averaged $77.57 per barrel in March, while those from Saudi Arabia were $87.01 per barrel.

The drop in prices with regards to Russia illustrated the difficulties of refiners to comply with the $60 price cap imposed by the European Union, and it was speculated that Russia and India may design alternative financial arrangements to circumvent the hurdles presented by the cap.