Oil Price Forecast: Early Strength Fueled by Debt Ceiling Deal Optimism

Highlights

• Crude oil prices increase on potential U.S. debt limit agreement.
• Worries about future interest rate hikes limit gains.
• Trading activity quiet due to public holidays in the UK and the U.S.

Overview

Crude oil prices are edging higher on Monday as there was news of a potential agreement on the U.S. debt limit, which could prevent a default in the world’s biggest economy and oil buyer. However, worries about possible future increases in interest rates limited the gains. It’s worth noting that trading activity is anticipated to be quiet on Monday due to public holidays in the UK and the U.S.

At 03:32 GMT, WTI Oil is trading $72.293, up $1.489 or +2.07%. On Friday, the United States Oil Fund ETF (USO) settled at $64.83, up $0.74 or +1.16%.

Debt Ceiling Deal Spurs Rally

U.S. President Joe Biden and House Speaker Kevin McCarthy reached a preliminary agreement to temporarily suspend the debt ceiling and impose spending limits for the next two years. This news boosted investor confidence and led to a relief rally in riskier assets, including commodities. The crude oil market experienced a positive impact from the improved sentiment, resulting in a rally.

Last week, both Brent and WTI crude oil prices increased by over 1%, marking the second consecutive week of gains. The positive movement was driven by progress in U.S. debt ceiling discussions and a warning from Saudi Arabia’s energy minister aimed at short-sellers. This warning was seen as a possible indication that OPEC and its allies, including Russia, might consider further production cuts during their upcoming meeting.

However, Russian oil officials suggested that Russia may opt to maintain current output levels rather than reduce production, creating uncertainty regarding OPEC+’s decision. Analysts are skeptical about the sustainability of the oil price rally due to concerns about potential interest rate hikes by the U.S. Federal Reserve in June. Higher rates could negatively affect crude oil demand and hinder long-term price growth.

Market participants will closely watch manufacturing and services data from China, the world’s largest oil importer. As well as U.S. nonfarm payroll data to assess economic growth and oil demand signals.

The uneven economic recovery in China has weighed on oil markets. Additionally, future oil output growth in the United States, the largest global producer, may slow down as energy companies continue to reduce the number of operating rigs. Last week, the count of active oil rigs reached its lowest level since May 2022, according to Baker Hughes Co’s weekly report.

Technical Analysis

WTI Oil is trading on the strong side of $72.57 (S1). If this move can fuel enough upside momentum over the near-term then look for the rally to possibly extend into the PIVOT at $78.02.

A sustained move under $72.57 (S1) will indicate that sellers have returned. If this creates enough downside momentum then look for the selling to possibly extend into $68.49 (S2) over the near-term.

Resistance & Support Levels

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