Oil falls 2 per cent on US debt deal struggles, OPEC+ talks uncertainty

Oil fell by nearly 2 per cent on Tuesday as concerns about the US debt ceiling pact cooled the market’s risk-on sentiment and mixed messages from major producers clouded the supply outlook ahead of their meeting this weekend.

Brent crude futures fell $1.36, or 1.8 per cent, to $75.71 a barrel by 0859 GMT. US West Texas Intermediate (WTI) crude was down $1.19, or 1.6 per cent, from Friday’s close, to $71.48 a barrel. There was no settlement on Monday because of a US public holiday.

Some hard-right Republican lawmakers said on Monday they might oppose a deal that would raise the debt ceiling in the US, the world’s biggest oil user, while Democratic President Joe Biden and Republican House of Representatives Speaker Kevin McCarthy remained optimistic the deal would pass.

Biden and McCarthy forged an agreement over the weekend and it must pass a divided US Congress before June 5, the day the Treasury Department says the country will not be able to meet its financial obligations, which could disrupt financial markets.

“A potential default would have catastrophic economic repercussions domestically as well as globally, which would have an adverse impact on oil demand,” PVM Oil’s Tamas Varga said.

The debt deadline nearly coincides with the June 4 meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, known as OPEC+, and the uncertainty over whether they will increase their output cuts amid a recent slump in prices is also weighing on the market.

Saudi Arabian Energy Minister Abdulaziz bin Salman last week warned short-sellers betting that oil prices will fall to “watch out” in a possible signal that OPEC+ may cut output.

However, comments from Russian oil officials and sources, including Deputy Prime Minister Alexander Novak, indicate the world’s third-largest oil producer is leaning toward leaving output unchanged.

In April, Saudi Arabia and other members of OPEC+ announced further oil output cuts of around 1.2 million barrels per day (bpd), bringing the total volume of cuts by OPEC+ to 3.66 million bpd, according to Reuters calculations.

Chinese manufacturing and service sector data out later this week will also be scrutinised for cues on the fuel demand recovery in the world’s top oil importer.