Oil prices drop as concerns over interest rate increases overshadow U.S. debt agreement.

On Monday, oil prices declined due to increasing concerns about potential interest rate hikes that could suppress energy demand, despite a preliminary agreement on the U.S. debt ceiling that could prevent a default by the world’s leading oil consumer.

Brent crude futures fell by 46 cents, or 0.6%, standing at $76.49 a barrel by 1450 GMT. Concurrently, U.S. West Texas Intermediate crude reached $72.44 a barrel, marking a 24 cents, or 0.3%, decrease.

Trading activity is anticipated to be muted on Monday due to public holidays in the UK and the U.S.

“The initial excitement over the debt agreement is fading as fears grow over the possibility of another interest rate increase by the Federal Reserve in June,” Liquidity Energy LLC, a brokerage firm, stated in a note.

Over the weekend, U.S. President Joe Biden and the Speaker of the House of Representatives, Kevin McCarthy, reached a consensus to suspend the $31.4 trillion debt ceiling and limit government expenditure for the coming two years. Both leaders displayed optimism that members from both the Democratic and Republican parties would vote in favor of the deal.

Nevertheless, analysts considered any potential uplift in oil prices resulting from the debt deal to be temporary, as early gains in the session had already dissipated.

According to the FedWatch Tool by CME, current market speculations indicate an approximately equal likelihood of the Federal Reserve implementing a further 25 basis points rate hike in its upcoming meeting on June 13-14. This is a notable rise from a mere 8.3% possibility of such a move being predicted a month earlier.

During the last policy discussion on May 2-3, the Federal Reserve hinted at a potential pause to its most assertive rate-increasing cycle since the beginning of the 1980s, which was expected to take place in the June meeting.

Tony Sycamore, an IG analyst based in Sydney, remarked that escalated U.S. rates pose a challenge to the demand for crude oil.

On June 4, a meeting is scheduled for the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, commonly known as OPEC+.

In a potential hint that OPEC+ might reduce output further, Saudi energy minister Abdulaziz bin Salman cautioned those predicting a drop in oil prices to “be vigilant.”

Statements from Russian oil authorities and insiders, including Deputy Prime Minister Alexander Novak, suggest that Russia, the world’s third-largest oil producer, is inclined to maintain its current output levels.

Craig Erlam, Senior Markets Analyst at OANDA, remarked, “The trading community is somewhat uncertain about what to anticipate.”

He further elaborated, “Saudi Arabia might be aiming to keep traders alert with their statements. However, making such comments without acting upon them could be seen as a lack of resolve, potentially leading to a downward trend in prices again.”

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