Crude oil prices started the week sluggishly, with the benchmarks declining slightly at the time of writing, after posting a modest gain for the previous week.
Brent crude was trading at a bit over $75 per barrel at the time of writing and West Texas Intermediate was changing hands for just over $71 per barrel as demand recovery fought for traders’ attention alongside U.S. debt ceiling negotiations.
The ongoing negotiations on the U.S. debt ceiling have in recent days become the primary bearish factor for oil as fears mount that a debt default is not out of the question. If it happens, it would decimate oil demand in the United States.
If history is any indication, there will be an agreement before the federal government runs out of money and default will be avoided. Until that happens, however, oil prices are likely to remain effectively capped.
According to Bloomberg, because of such pressures, Brent crude might end up with its fifth monthly loss in a row this month, which would be the benchmark’s worst performance since 2017.
Commenting on the debt ceiling talks, one Saxo Capital analyst told Bloomberg that “Despite hopes of the talks resuming, there are risks that a deal will be delayed to the last minute.”
Meanwhile, traders are keeping an eye on China, too. "If the housing market continues to fall and policymakers fail to respond, the risk of a double-dip China slowdown increases, which spells bad news for crude oil consumption and demand," an IG analyst based in Australia told Reuters.
Yet beyond the next month or so the prospects for oil appear to be more bullish. The IEA recently forecast a deficit emerging in the second half of the year, to the tune of 2 million barrels daily. This should have a positive effect on prices unless demand gets hurt by a U.S. default or another event of similar proportions.
By Irina Slav for Oilprice.com
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