Oil rallies for second day after Senate votes through debt-ceiling deal, NFPs fuel uptrend

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• Oil price recovers for the second day after the debt-ceiling bill gets voted through by the US Senate. 
• The possibility of OPEC+ announcing more production cuts at its June 4 meeting further supports Oil. 
• The breakeven price for the Saudis is $80 a barrel despite Russia downplaying the need for cuts.
• Nonfarm payrolls beats estimates but the initial boost to the US Dollar reverses on higher-than expected unemployment and a wage disinflation.

Oil price rallies for the second day on Friday as global markets breathe a sigh of relief after the US Senate votes through the debt-ceiling extension bill, vaulting the final hurdle prior to implementation. Increasing expectations that the US Federal Reserve (Fed) will pause on hiking rates at the next Fed meeting in mid-June caps the US Dollar’s progress, further helping Oil, which is priced in USD.  The release of Nonfarm payrolls does little to change the picture as a higher-than-expected 339K payrolls is offset by an unexpected rise in the Unemployment Rate to 3.7% – if anything Oil appears to have caught a bid after the publication of the data. 

At the time of writing, WTI Oil is trading in the upper $71s and Brent Crude Oil in the upper $79s. 

Oil news and market movers 

• Oil recovers for the second consecutive day after the debt-ceiling extension deal gets passed by the US Senate and lands on the President’s desk for sign off. 
• The bill means the US debt limit will be raised and averting a US default, which would have led to market mayhem, potentially causing a slowdown in the global economy. 
• The possibility that the Federal Reserve (Fed) will pause hiking interest rates at their June 14 meeting is a headwind for the US Dollar and a backdraft for Oil price. 
• On Wednesday Fed’s Philip Jefferson said he thought a pause before more hikes later might allow the economy time to digest current tightening and avoid bank stress. 
• Jefferson’s view of ‘pausing’ in June was echoed by Philadelphia Fed President Patrick Harker. 
• Cleveland Fed President, Loretta Mester, however, said she saw no “compelling” reason to pause, in an interview with the Financial Times on Wednesday. 
• The CME FedWatch Tool, which provides an insight into the market view of the probability of future rate hikes, has flipped from previously showing odds favoring a 0.25% hike in June to an over 75% chance the Fed will leave rates unchanged.   
• US Nonfarm payrolls data comes out a mixed bag: payrolls themselves grew by 339K in May when only a modest 190K had been forecast by economists. Euphoria over the headline rise in job growth led to a knee-jerk strengthening of the US Dollar but it soon returned to previous levels after traders noted the unexpected rise in the Unemployment Rate of 3.7% (vs expectations of 3.5%, and 3.4% previous). 
• An unforseen slowdown in wage inflation to 4.3%, vs the 4.4% forecast, further cast a shadow over the strong headline figure. The mixed data suggests an increaased chance the Fed may stand pat at their next rate meeting in June, capping USD but buttressing Oil in the process.
• Two of OPEC+’s largest members, Russia and Saudi Arabia, appear to be clashing over policy ahead of the next OPEC meeting on June 4. 
• According to sources in Riyadh, the Saudis are unhappy with the way Russia is allegedly flaunting quotas agreed at the October meeting, a report on Oilprice.com says. 
• Although there is no official data available on Russian production, shipping data appears to corroborate the allegation they may have increased their Oil exports despite the OPEC+ limits agreed. 
• Last week, representatives of the two countries gave conflicting messages about the likely trajectory of the up-and-coming OPEC+ meeting. 
• The Saudis are likely to continue to apply pressure for OPEC+ to cut production given analysts estimate its breakeven level is $80 per barrel, which is still above the current low price levels. 

Crude Oil Technical Analysis: Price recovers from 200-week SMA, still in downtrend

WTI Oil price is still broadly speaking in a longer-term downtrend that started in July 2022. Given the old saying that the trend is your friend, this favors short sellers over longs. 

WTI Oil is trading below all the major daily and weekly Simple Moving Averages (SMAs) except the 200-week SMA at $66.90. On Wednesday it found support at this MA and began its recovery. 

WTI US Oil: Weekly Chart

A bullish hammer candlestick is in the process of forming on the weekly chart but until the week is over it is impossible to say if it will fix. Even if it does, it would have to be followed by a bullish green bar next week to confirm the reversal. 

Given the downtrend remains intact more downside is still possible, however, it would require a break below the year-to-date lows at $64.31 to confirm more downside. 

Such a break could lead to the next target at around $62.00, where trough lows from 2021 will come into play, followed by support at $57.50.

WTI US Oil: Daily Chart

Oil price needs to climb back above the $74.70 May 24 highs to raise significant doubts about the dominance of the bear trend. 

Such a break might lead to a potential target in the $79.70s, which roughly coincides with the 200-day SMA and the main trendline for the bear market, heightening its importance as a key resistance level. 

The long hammer Japanese candlestick pattern that formed at the May 4 (and YTD) lows is a sign that Oil price may have formed a strategic bottom at that level and raises the suspicion the bear trend may be reaching a conclusion.