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Uncertainty in the Energy Market: US Debt Limit Optimism Checked by Fed Rate Hikes

Amid a turbulent financial landscape, oil prices face downward pressure as the potential joy over the US debt ceiling agreement is counterbalanced by looming Federal Reserve interest rate hikes.


Oil Price Decline: Fed's Monetary Policy vs. US Debt Limit Agreement

Oil prices exhibited a downturn on Monday, nullifying earlier progress. This fluctuation stemmed from the contrast between the buoyancy surrounding the debt ceiling agreement and the anxiety induced by the Federal Reserve's consistent push for interest rate increases. As of 07:00 ET (11:00 GMT), U.S. crude futures were trading at a slightly lowered rate, 0.15% less at $72.56 per barrel. Similarly, Brent slipped by 0.30% to $76.75 per barrel. The market activity is expected to be subdued, given the closure of U.S. and U.K. markets for a holiday.

Impact of US Debt Ceiling Deal on Oil Market Dynamics

Benchmarks, following two straight weeks of gain, were initially given a boost due to the anticipation that the agreement to increase the U.S. debt limit to $31.4 trillion would help avert a potential disastrous default. This move was predicted to benefit the world's largest economy and, in turn, the largest oil consumer.

Federal Reserve's Interest Rate Hikes: A Threat to Oil Demand?

However, the trading community remains wary of the Federal Reserve's potential decision to hike borrowing costs. This anxiety was fueled by an April inflation measurement, which exceeded the predictions of the U.S. central bank. Analysts reported by Reuters indicated that this increase could suppress oil demand.

Upcoming Reports and Meetings: What to Expect for Oil Prices

As the Federal Reserve officials prepare for their June meeting, they will be analyzing more data, including the nonfarm payrolls report for May. The highly anticipated jobs report, scheduled for release on Friday, is forecasted to reveal a decrease in the number of jobs added to the U.S. economy. Last month's figure of 253,000 jobs is expected to drop to 180,000 for May.

The CME FedWatch Tool, a program that monitors the likelihood of rate alterations, now predicts a 66.42% probability of a quarter-point rate increase at the Fed's June meeting, a significant increase from last week's 25.66%. The probability of maintaining the current rates has dipped to 33.58% from 74.34% last week.

OPEC and Allies Meeting: Potential Production Cut?

Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) along with its allies, including Russia, are due for a meeting on Sunday. There's a degree of uncertainty looming over whether the group will opt to reduce production levels.