Oil Prices Volatile as Debt Ceiling Deal Fails to Sustain Boost Amid Fed Rate Hike Concerns

Oil prices experienced fluctuations on Monday as the market grappled with the potential implications of a tentative U.S. debt ceiling deal and the looming possibility of further interest rate hikes by the Federal Reserve.

Brent crude oil, against which Nigerian oil is priced, appreciated by 0.2% to $77.07 a barrel, while the U.S. West Texas Intermediate crude rose by 0.3% to $72.92 a barrel.

Both benchmark crude prices oscillated between positive and negative territory throughout the day, with trading subdued due to public holidays in the UK and the U.S.

Analysts at brokerage Liquidity Energy LLC noted, “The euphoria of the debt deal is wearing off as concern mounts for another rate hike by the Fed in June.”

Over the weekend, U.S. President Joe Biden and House of Representatives Speaker Kevin McCarthy reached an agreement to suspend the $31.4 trillion debt ceiling and implement a cap on government spending for the next two years. While both leaders expressed confidence in bipartisan support for the deal, analysts remained skeptical about any significant and lasting impact on oil prices.

Currently, market expectations indicate a roughly 50-50 chance of a 25 basis points rate hike by the Federal Reserve at its upcoming June 13-14 meeting, a substantial increase from the 8.3% probability predicted just a month ago, according to CME’s FedWatch Tool. The Federal Reserve, which hinted at a potential pause in its aggressive rate-hiking cycle in June during its last policy meeting on May 2-3, poses a concern for crude oil demand if rates are raised.

“Higher U.S. rates are a headwind for crude oil demand,” warned Tony Sycamore, an analyst at IG based in Sydney. The potential impact of rate hikes on energy demand looms amidst the backdrop of a declining dollar, which weakened further on Monday as the debt ceiling deal boosted risk appetite in global markets, diminishing the greenback’s appeal as a safe-haven currency. A lower-valued dollar typically stimulates oil demand, as the commodity is priced in dollars.

Looking ahead, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, are scheduled to convene on June 4. In a possibly ominous signal to short-sellers betting on falling oil prices, Saudi Energy Minister Abdulaziz bin Salman cautioned them to “watch out,” hinting at the possibility of further production cuts by OPEC+. However, conflicting signals emerged from Russian oil officials and sources, including Deputy Prime Minister Alexander Novak, indicating a leaning toward maintaining current output levels.

The uncertainty surrounding the upcoming OPEC+ meeting has left traders perplexed. Craig Erlam, senior markets analyst at OANDA, remarked, “Traders have been left a little confused as to what we can expect. It may be that Saudi Arabia wants to keep traders on their toes, but to make these comments and not follow through could be perceived as weak and see prices drift lower again.”