Oil breaks lower on fears debt-ceiling deal could be derailed

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• Oil price has weakened as investors start to fear the deal to extend the debt ceiling may be derailed by Congress.

• Mixed messages from OPEC+ members further confuse the market – next meeting is June 4. 

• Odds still favor a rate hike from the Fed at their next meeting, putting downward pressure on Oil.

Oil price slides lower on Tuesday as investors question whether the debt-ceiling deal will get voted into law. At least two rebel Republicans and one Democrat have voiced their disapproval and may vote against the deal. If the US defaults on its obligations, financial chaos is expected to follow, probably hitting the Oil price, though some analysts have said the US Dollar might also suffer, which would be positive for Oil since it is mostly priced in USD. Mixed messaging from OPEC+ adds to the opaque outlook. 

At the time of writing, WTI Oil is trading in the upper $71s and Brent Crude Oil in the upper $75s.  

Oil news and market movers 

• Oil price loses ground as investors worry about whether the debt-ceiling deal agreed by President Joe Biden and Republican House Speaker Kevin McCarthy will get enough votes in both Congress and the Senate to pass into law.

• A vote in Congress could be as soon as Wednesday, but so far, at least two House Republicans have voiced their displeasure at the idea of increasing the country’s already gigantic debt pile. For different reasons, Democrat Riche Torres has criticized the cuts to disability benefits that form part of the agreement.  

• Both the debt deal as well as robust US macroeconomic data has increased market expectations that the Federal Reserve (Fed) will have to raise interest rates to combat rising inflation expectations – bullish for the US Dollar; bearish for Oil.  

• The CME FedWatch tool shows a 58% chance of the Fed raising interest rates by 0.25% at their meeting on June 14 (at time of writing).  

• Although this is down from the previous day’s 60% it still shows the odds favor a rate hike at the June meeting rather than no change as had been the prior expectation. 

• Oil traders further await the outcome of the next meeting of OPEC+ on June 4, when the possibility of production cuts has been mooted.  

• Investors remain a little confused as two of OPEC+’s largest members seem to be giving divergent messages over what might happen. 

• Last Tuesday, May 24, Saudi Oil Minister Prince Abdulaziz bin Salman seemed to imply OPEC+ might cut production quotas when he warned speculators (interpreted as short-sellers) to “watch out” and expressed support for OPEC’s October decision to cut supply. 

• 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: Mixed technical outlook leads to waiting game

WTI Oil is in an established downtrend from a technical perspective, making successive lower lows, and so given the old adage that the trend is your friend, this overall favors short sellers over longs. 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: Weekly Chart

That said, a possible bullish right-angled triangle may have just finished forming, as shown by the dotted lines on the chart below. 

WTI US Oil: Daily Chart

Price initially seemed to break out above the upper borderline of the triangle on May 24 but then failed to follow through higher and reversed, forming a spinning top Japanese candlestick reversal pattern in the process. It then rallied on Monday before capitulating again and is currently trading back below the lower border. 

A decisive break below the May 22 lows of $70.65, or better still, the $69.40 May 15 lows, would provide confirmation that the triangle is actually breaking out lower. Such a break ought to be represented by a long red candlestick or three down-days in a row for solid confirmation. 

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.

A breakout higher is still possible, however. The three green up bars in a row that occurred prior to the bullish breakout on May 24 are a strong signal, suggesting there is still a chance price could recover. 

Oil price needs to climb back above the $74.70 May 24 highs for confirmation. 

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.