Oil prices dip as interest rate hike worries offset US debt deal

Brent has lost about 10% of its value since the beginning of the year

Oil pump jacks in Russia. Opec+ will meet on June 4 as crude prices trade below $80 a barrel. Bloomberg

Oil prices dipped on Monday over concerns of a possible interest rate hike that could have a dampening impact on oil demand. The fears over the Fed further tightening the monetary policy increased a day after a tentative agreement was reached in the US to raise the nation’s debt ceiling following a month-long stalemate.

The deal potentially averts a financial crisis in the world’s largest economy and biggest crude oil consumer.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.47 per cent lower at $76.58 a barrel at 7:25pm UAE time. West Texas Intermediate, the gauge that tracks US crude, was down 0.19 per cent at $72.53 a barrel.

US President Joe Biden and senior Republican official Kevin McCarthy reached a provisional agreement late on Saturday to suspend the federal government's $31.4 trillion debt ceiling.

Congress must now approve a package that includes spending cuts to avert a disastrous default after the White House agreement was reached “in principle”.

“The prospect of a positive resolution to the debt ceiling fight in the US should help to spur on some risk appetite while markets will be looking ahead to the next Opec+ meeting in early June,” said Daniel Richards, Mena economist at Emirates NBD.

“The meeting is likely to be live as Saudi Arabia may lean towards supporting another output cut or, at least, spreading the cut across all members of the producers’ alliance.”

The oil producer's group will meet on June 4 as crude prices trade below $80 a barrel despite the announcement of an output cut by some members last month.

Brent has lost about 10 per cent of its value since the beginning of the year as weak economic growth in the US and China weigh on the outlook for fuel demand.

Last week, Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman told oil market short sellers to “watch out”, which was seen by some traders as a signal for further output reductions.

However, Russian Deputy Prime Minister Alexander Novak later said he expected no new steps from Opec+, Reuters reported, citing his interview with Russian daily Izvestia.

Further oil future gains were limited by the growing possibility of an interest rate raise by the US Federal Reserve.

“US spending and inflation data surprised to the upside in April data … keeping the chance of a further rate hike by the [Federal Open Market Committee] in play, especially on the back of hawkish messaging from a number of Fed officials in recent weeks,” said Mr Richards.

The Personal Consumption Expenditures Price Index, a key inflation metric, rose by 0.4 per cent last month, beating the Dow Jones's 0.3 per cent estimate, data released by the US Commerce Department showed.

Prices increased by 4.4 per cent on an annual basis.

Real PCE, which excludes food and energy, increased by 4.7 per cent on an annual basis.

The International Monetary Fund expects the US to avoid a recession but says inflation will remain above the Fed’s 2 per cent target this year and the next.

“On the Q4-to-Q4 basis, we expect the economy to grow by 1.2 per cent this year and retain momentum into 2024. Unemployment, we see as rising slowly to get close to 4.5 per cent by 2024,” the fund’s managing director, Kristalina Georgieva, told reporters on Thursday in Washington.