World oil prices opened lower in trading earlier this week (May 22). Brent oil moved at $75.09 per barrel or weakened by 0.99 percent. Meanwhile, WTI (West Texas Intermediate) also fell by 0.85% and traded around $71.22 per barrel.
Market anticipation of United States debt ceiling talks became a catalyst that weakened oil. After a stalemate last week, congressional Republicans and Democrats are scheduled to resume negotiations on the debt ceiling issue.
At the same time, President Joe Biden will hold a meeting with top Republican, Kevin McCarthy. Biden has said that he is willing to cut some of the spending items that have been met with opposition. However, he feels that the latest demands from Republicans are "unacceptable."
Effect of Interest Rate Outlook and Global Economy
This inevitably increases tensions ahead of the US debt ceiling deadline which is just days away. The risk of a U.S. government default has roiled oil markets for some time now.
The reason is, investors are worried about the economic impact that can be caused after a default. Given the United States' position as one of the largest oil consumers, the default status has the potential to weigh on the oil demand side.
Despite the turmoil in the American parliament, some analysts argue that the near-term oil price outlook has also come under pressure from hawkish statements by Fed officials.
However, the sentiment subsided slightly after Jerome Powell expressed his opinion on the impact of the banking crisis on the urgency of raising interest rates.
Chinese Economic Data Dimmed the Oil’s Demand
Meanwhile, the dimming global economic outlook in 2023 has also triggered its own concerns. A number of Chinese economic data released recently confirm that the post-COVID economic rebound is starting to slow.
This condition dimmed expectations of oil demand which was previously predicted to reach record highs. The US dollar Index or DXY weakened in the New York session last Friday.
Then it was opened depressed in trading earlier this week (May 22). The Fed Chairman Jerome Powell's speech eroded market hopes for further rate hikes in June.
Uncertainty in the America’s debt ceiling negotiations also made market participants hesitant to push the dollar's rally to higher levels. This matter is seemed impossible.
Top Fed’s Officials Gave the Hawkish Comment
Hawkish speeches from several top Fed officials earlier in the week prompted markets to expect one more rate hike in June. It was erasing expectations of a rate cut later this year.
However, all that speculation was put to rest following Powell's speech ahead of the holiday weekend. Powell told a central bank conference in Washington that tighter credit conditions meant Something.
It means that interest rate policy doesn't need to increase as much as they should to to achieve their goals. He further reiterated that every decision will be made "meeting by meeting" according to the development of the situation going forward.
The content of Powell's speech reflected a neutral - rather than dovish or hawkish stance. That is why; he could not hoist the dollar further without confirmation of future economic data
US debt Ceiling Negotiations will be Continued
Market participants are now monitoring the next speeches of the Federal Reserve officials. That is as well as the US debt ceiling negotiations that continue this week.
Negotiations between The American President Joe Biden and top US Congress officials last week broke up abruptly as Republican negotiators decided to walkout.
The two camps agreed to resume negotiations on Monday after reconciling by phone on Sunday. Analysts expect the tug-of-war to continue until the last second, so the risk of default continues to loom.
However, they are optimistic that an agreement can be reached. The movement of the US dollar will continue to be influenced by developments in some of these crucial aspects.