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Oil Tumbles Below $70 on Market Uncertainty

Stavros Tousios | Wednesday 31 May 2023

Crude oil (CL) fell below $70 a barrel on Tuesday, May 30th, dropping 4.4% to reach $69.46 at the close of US markets. The decline marked the lowest price the oil market has seen in nearly a month. It came about from a series of concerns that weighed on the price of crude, including worries over recent Saudi Arabia-Russia tensions ahead of OPEC+'s monthly meeting on June 4 and worries that the debt ceiling deal might face obstacles in Congress.

Oil prices took another beating early on Wednesday, May 31st after disappointing economic data from China raised additional concerns over slow demand. China's manufacturing sector saw activity contracting for a second month in a row, with overall business activity softening in a sign that the post-covid rebound might be losing its steam. NBS Manufacturing PMI slid from 49.2 to 48.8 and below upbeat estimates of 49.4, questioning whether the world's largest importer can drive demand.

An image of oil prices

The Debt Ceiling Drama May Not Be Over Yet

The market appears to be uneasy until the votes on the debt ceiling deal are finalised. The resolution was agreed last weekend, May 27,  but the 99-page text was brought to the House only on Tuesday. House Speaker Kevin McCarthy urged members of the Republican party to support the agreement, but some dissenters appear to be testing it instead, spilling some of the uncertainty into the oil prices. 

The bill must pass through the House and Senate before Monday, June 5, which is the date when the Treasury Department says the government will no longer be able to reach its financial obligations, potentially sending the market into turmoil. Both sides of the disagreement remained optimistic that the bill would pass, but market analysts expect the market to be uncertain until the votes are in and counted.

Will OPEC+ Increase Cuts on June 4th?

The expanded oil cartel, OPEC+, combining the Saudi-led OPEC with ten other Russian-led oil-producing countries, is scheduled to meet on Sunday, June 4. Media reports suggest rising tensions between Saudi Arabia and Russia as the latter continues to pump large amounts of cheaper crude into the market while Saudi Arabia is looking to bolster energy prices. 

Some analysts say that deeper cuts from OPEC+ cannot be ruled out. However, most market watchers expect the cartel to keep production targets unchanged, which also weighs on oil prices. Moreover, a weak global economic environment might make the case for less production. This year, oil prices have dropped around 14% on China's disappointing economic recovery. (Source:Yahoo Finance)

Will the Fed Keep Raising Interest Rates?

The disappointing reading of the activity of the Chinese manufacturing sector raised concerns that oil demand was slowing. In return, this put into question the forecasts that demand would rise in China's economic growth. The dollar also got stronger, weighing on the crude price, on improved expectations that the Fed would keep hiking interest rates in the coming months.

Despite the debt deal resolution taking the edge off significant concerns over a potential default in the US, markets remained cautious over the increasing chances of hiking interest rates to battle inflation, which would put a lead on economic activity.

Moreover, preliminary data from the long Memorial Day holiday weekend in the US did not see as much demand as anticipated, The holiday usually signals the start of the driving season in the most prominent global consumer of petroleum. 

Fuel demand dropped 1.3% last week. Economists are speculating that a large build in the Nonfarm Payrolls numbers to be reported on later in the week, on Friday, June 2,  could push the FOMC to hike when they meet next on June 13-14.

In conclusion, worries over whether the US Congress could pass the debt deal through Congress and mixed messages from major crude producers ahead of a critical OPEC+ meeting on June 4th contributed to oil prices falling more than 4% on Tuesday, June 30th. The debt deal must be signed before June 5th, when the US government is expected to run out of money if the debt ceiling isn't lifted. Can US lawmakers surprise the market with an early count or drag the debate for longer? Traders will have to wait and see.

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