Oil plunges on doubts whether debt ceiling deal will get enough votes

• Oil prices spiral downward as traders deleverage ahead of the key vote on whether the US should raise its debt limit.
• A growing number of congressional Republicans have expressed their disapproval of the deal and have indicated their intention to reject it.
• Mixed messages from top OPEC+ members ahead of the June 4 meeting add to uncertainty.

The price of oil falls on Wednesday, while doubts grow about whether the agreement to raise the US debt ceiling will be voted on by Congress. A group of rogue Republicans and some Democrats have also warned that they could vote against the deal. If it is not approved and the US defaults on its obligations, financial chaos is expected which will affect demand for oil and push prices down. That being said, the US dollar could also be affected, which would be positive for oil, which is mainly traded in US dollars. Uncertainty about the outcome of the next OPEC+ meeting and mixed messages from major members add to the opacity of the outlook.

At the time of writing, oil WTI is trading above $67 and Brent crude is below $72.

Oil news and market movements

Oil price loses ground as investors question whether the tentative agreement to extend the debt limit, reached by President Joe Biden and Republican Speaker of the House Kevin McCarthy over the weekend, will get enough votes in Congress to become law.
The House of Representatives is expected to vote on the deal Wednesday night before it goes to the Senate for a final vote.
Several Republicans in the House of Representatives have expressed their discontent with the idea of ​​increasing the already gigantic debt of the country. Some Democrats also oppose the bill because it cuts benefits. Democratic Congressman Richie Torres, for example, has criticized cuts in disability benefits.
Expectations of a last-minute debt ceiling deal, as well as strong US macroeconomic data, have raised market expectations that the Federal Reserve (Fed) will have to raise interest rates to combat the rising inflation expectations, which is bullish for the dollar and bearish for oil.
As of this writing, CME’s FedWatch tool shows that the odds remain favorable (around 60%) for the Fed to raise rates by 0.25% at its June 14 meeting.
Oil traders await the outcome of the next OPEC+ meeting on June 4, at which the possibility of cutting production has been raised.
However, two of the largest OPEC+ members seem to give mixed messages on what could be decided.
Saudi Oil Minister Prince Abdulaziz bin Salman appeared to hint that OPEC+ might cut production quotas on Tuesday, May 24, when he warned speculators (interpreted as short sellers) to “be careful”, saying their support for OPEC’s October decision to cut supply.
On the other hand, Russian Energy Minister Alexander Novak downplayed the idea of ​​production cuts, stating that “I don’t think there will be any new measures, as just a month ago certain decisions regarding the voluntary reduction of oil production by some countries.”

Oil Technical Analysis: Price Falls Again in Line with Long-Term Downtrend

The WTI oil price paints redder on the charts as it falls back in line with the prevailing downtrend, which has made successive lower lows since July 2022. As the old adage goes, “the trend is your friend until the curve at the end”, which since it is bearish favors short sellers. WTI Oil is trading below all of the daily and weekly SMAs and is now also testing the 200-week SMA at $66.90.

WTI Oil: Weekly Chart

The potentially bullish right triangle, which formed in May and is shown by the dotted lines on the daily chart, failed to break higher and instead broke lower.

WTI Oil: Daily Chart

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

A break below the year-to-date lows would reignite the downtrend, with the next target being around $62.00, where the 2021 lows would come into play, followed by support at $57.50.

Oil needs to break above the May 24 high of $74.70 again to cast doubt on the prevailing downtrend.

Such a break could lead to a potential target at $79.70, which roughly coincides with the 200-day SMA and the main trend line of the bear market, adding to its importance as a key resistance level.

The long hammer candlestick pattern that formed at the May 4 (and year-round) lows is a sign that the price of oil may have formed a strategic bottom at that level.

WTI Oil FAQ

What is WTI oil?

WTI oil is a type of crude oil that is sold on international markets. WTI stands for West Texas Intermediate, one of the three main types, including Brent and Dubai crude. WTI is also called “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 through the Cushing hub, considered “the pipeline junction of the world.” It is a reference for the oil market and the WTI price is frequently quoted in the media.

What factors determine the price of WTI oil?

Like all assets, supply and demand are the main drivers of the WTI oil price. As such, global growth can be a driver of increased demand and vice versa in the case of weak global growth. Political instability, wars and sanctions can alter supply and affect prices. The decisions of OPEC, a group of the main oil-producing countries, is another key factor in the price. The value of the US dollar influences the price of WTI crude oil, as oil is mainly traded in US dollars, so a weaker dollar can make oil more affordable and vice versa.

How do inventory data influence the price of WTI oil?

The weekly reports on oil inventories published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) influence the price of WTI oil. Changes in inventories reflect the fluctuation of supply and demand. If the data shows a decline in inventories, it may indicate an increase in demand, which would drive up the price of oil. An increase in inventories may reflect an increase in supply, which would lower prices. The API report is released every Tuesday, and the EIA report the day after. Their results are usually similar, with a difference of 1% between them 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 that collectively decide member countries’ production quotas at biannual meetings. Their decisions often influence WTI oil prices. When OPEC decides to cut quotas, it can restrict supply and drive up oil prices. When OPEC increases production, the opposite effect occurs. OPEC+ refers to an expanded group that includes ten additional non-OPEC members, the most notable of which is Russia.