TOCOM Energy

Oil prices remain rangebound amid debt ceiling standoff and constrained supply

Wu Hai

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May 23, 2023 5 min read

Crude oil futures went into a sharp downturn last Friday as debt ceiling talks paused which raised the prospect of a catastrophic default for traders. However, Markets are cautiously optimistic about a US debt ceiling deal, while supply constraints are supporting prices.

On the macroeconomic level, Fed Chair indicated Friday that the Federal Reserve will likely forgo an increase in its benchmark interest rate when it meets in June for the first time since it began raising rate 14 months ago to fight high inflation. He said the benchmark rate, which affects many consumer and business loans, is now high enough to restrain borrowing, spending and economic growth. Under that view, the Fed should take time to assess the consequences of its actions and avoid tightening credit so much as to trigger a recession.

The latest shift in sentiment which during the past week put the odds of a pause of Fed rate hike next month as high as 80% — will face a test in the week from slew of data that will gauge the strength of the economy.

Pausing rate hikes as a response to recession scares is reminiscent of the “stop-and-go” strategy the Fed employed in the 1970s, when the central bank alternated between raising rates to fend off inflation and stopping them to shore up growth at the same time. The Fed didn’t succeed at either when it did that, and inflation instead settled at elevated levels. A lesson of the past is that it is hard to get inflation under control unless interest rates rise enough to be above the rate of inflation, the amount of America’s debt also makes fighting inflation harder today than in the past, any increase in interest rates sufficient to fight inflation would quickly explode the federal budget.

On the supply side, market watchers have kept a close eye on both Saudi and Russian production and export figures in April and May. According to shipping data, both producers ramped up exports in April. As the production cut went into effect this month, oil production is expected to fall.

The prevailing view doesn’t see a continued fall in Russian production for the rest of the year, as demand from China and India is expected to remain robust during the second half of the year.

The IEA has once again upgraded its forecast for oil production in Russia for this year and now it expects a decrease in oil production by 350,000 barrels per day instead of the previously expected 530,000 barrels per day according to its fresh report last Tuesday.

On the refining sector, the global diesel complex has stabilized somewhat over the last week or two, beginning to reverse some bearish trends and moving off of bottoms realized around the beginning of the month.

The uptick in the market has largely been driven by forces outside of Europe as Europe is pricing itself out of receiving additional barrels, record high demand in India, and falling inventory levels in Singapore are the kind of bullish indicators, the move back into a typical range for this time of year at least staves off suggestions of an impending demand-side collapse.

Various drivers will affect refining margins with risks still pointing to the downside. While demand remain flat, further dampening the outlook is a batch of new supply coming online mostly in the Middle East and China. We are heading back to a period where global refining capacity will run in excess of global products demand and crude supply for a few years. So run cuts in some region is possible, If margins were to drop further, European refiners might be compelled to cut runs before their counterparts east of Suez.