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Oil finds support after deal is struck to extend debt ceiling in US

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  • Oil price finds a floor after Republicans and Democrats agree a deal to extend the US government debt ceiling on Sunday.
  • The deal means a default is unlikely and boosts demand prospects in the US. 
  • US interest rates are expected to rise further after debt deal and strong US macro data.
  • Higher interest rates, however, will strengthen the US Dollar but weigh on Oil.  

Oil price remains in a familiar range within the $72s on Monday, as traders in both the US and UK take a break to enjoy the bank-holiday weekend. WTI Oil is finding support from the news US lawmakers have agreed to extend the US debt ceiling, subject to a vote in Congress. Yet this has also had the effect of raising interest rate expectations – a factor weighing on Oil price. Higher interest rates will lead to a stronger US Dollar, putting pressure on Oil price, which is priced in Dollars. 

At the time of writing, WTI Oil is trading in the mid $72s and Brent Crude Oil in the mid $76s.  

Oil news and market movers 

  • Oil settles in a familiar range as traders in the US and UK take time off for a long bank-holiday weekend. 
  • Crude is supported by the news that a deal has been struck to extend the debt-ceiling deal on Sunday, between House Republicans and Democrats. 
  • More upside is expected on Tuesday, when market participants return to their desks, and once the debt deal has been voted through Congress, the final step to making it law. 
  • The extension of the debt ceiling as well as robust US macroeconomic data has increased market expectations that the Federal Reserve (Fed) will have to raise interest rates at their next meeting to combat rising inflation expectations – bullish for the US Dollar; bearish for Oil.  
  • The CME FedWatch tool shows a 60.7% chance of the Fed raising interest rates by 0.25% at their meeting on June 14.  
  • Traders further await the outcome of the next meeting of OPEC+ on June 4, when the possibility of production cuts has been raised.  
  • Saudi Oil Minister Prince Abdulaziz bin Salman seemed to imply OPEC+ might cut production quotas when he warned speculators (interpreted as short-sellers) should “watch out” at a press conference last week. 
  • Russia’s Energy Minister Alexander Novak, however, later played down the idea of production cuts. “I don’t think that there will be any new steps, because just a month ago certain decisions were made regarding the voluntary reduction of oil production by some countries,” he said. 

Crude Oil Technical Analysis: Triangle formation hinting end of downtrend?

WTI Oil is in a long-term downtrend from a technical perspective, making successive lower lows. Given the old adage that the trend is your friend, this favors short positions over long positions. WTI Oil is trading below all the major daily Simple Moving Averages (SMA) and all the weekly SMAs except the 200-week, which is at $66.90. 

WTI US Oil: Daily Chart

A right-angled triangle has probably finished forming as shown by the dotted lines on the chart above. 

The triangle initially broke out to the upside, with price breaking above the upper border of the triangle on May 24 but then failed to follow-through higher and reversed. It is currently trading just below the lower border. 

A breakout higher is still possible. The three green up bars in a row that occurred prior to the bullish breakout on May 24 are a bullish sign in themselves. It suggests there is still a chance price could recover after the May 25 sell-off and eventually continue breaking out higher. 

Such a bullish breakout could see Oil price rise in a volatile rally to a potential target in the $79.70s, calculated by using the usual technical method, which is to take 61.8% of the height of the triangle and extrapolate it from the breakout point higher. Oil price could even go as far as a 100% extrapolation, however, the 61.8% level roughly coincides with the 200-day SMA and the main trendline for the bear market, heightening its importance as a key resistance level. 

Assuming Oil price reaches its target, a bullish break would also signify that price had surpassed the key $76.85 lower high of April 28, thereby, bringing the dominant bear trend into doubt.

The long hammer Japanese candlestick pattern that formed at the May 4 (and year-to-date) lows is a further sign that Oil price may have formed a strategic bottom. 

Further, the mild bullish convergence between price and the Relative Strength Index (RSI) at the March and May 2023 lows – with price making a lower low in May that is not matched by a lower low in RSI – is a sign that bearish pressure is easing. 

That said, until Oil price actually climbs back above the $74.70 May 24 highs there is still a possibility WTI Oil price could break out lower. A break below the May 22 lows of $70.65, or better still the $69.40 May 15 lows, would provide confirmation.

 


WTI US Oil: Weekly Chart

A break below the year-to-date (YTD) lows of $64.31 would imply a new lower low was forming, reigniting the downtrend. The next target from there would be at around $62.00, where trough lows from 2021 will come into play, followed by support at $57.50.

WTI Oil FAQs

What is WTI Oil?

WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “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 via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.

What factors drive the price of WTI Oil?

Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.

How does inventory data impact the price of WTI Oil

The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 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 who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.

 

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