Oil, Equities Turn Lower After Debt Ceiling Talks Stall

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange reversed lower in Friday's afternoon session after high-stakes talks between the White House and House Republicans to raise the debt ceiling have been paused, stoking concern the U.S. government could default on its debt as early as June 1.

"White House is not being reasonable. We are not going to sit here and talk to ourselves," said Representative Garret Graves, R-La., minutes after Republican negotiators walked out of the negotiations room.

According to several sources cited in reports on the debt talks, not one but multiple issues have proven problematic for both sides to reach an agreement.

As the White House presses to raise debt ceiling deadline past the 2024 presidential election, Republicans are insisting on a spending cap for the next year that would roll back government spending to 2022 levels.

"Look, we can't be spending more money next year," House Speaker Kevin McCarthy told reporters Friday after the talks broke down. "We must spend less than we spent the year before. It's pretty easy."

For the oil markets, the prospect of the United States defaulting on its debt would have disastrous consequences, likely leading to a pullback in economic activity and demand for refined fuels.

U.S. has remained one of the bright spots for demand growth this year as China's rebound from COVID lockdowns has disappointed, and Europe still struggles with high levels of inflation. Against this backdrop, Federal Reserve Chairman Jerome Powell said on Friday that interest rates might not need to go as high as previously expected amid ongoing tightening of credit conditions stemming from the collapse of Silicon Valley Bank.

Powell reiterated, however, that the central bank is strongly committed to bring down inflation to its 2% target. His comments follow a chorus of Fed officials who voiced their concerns this week that inflation is not coming down as fast as many have expected.

St. Louis Fed Bank President James Bullard in a Financial Times interview this week said the "slower pace of disinflation may warrant taking out some insurance by raising rates somewhat more to make sure that we really do get inflation under control."

Similar sentiment was echoed in comments from Dallas Fed President Lorie Logan, who said "the pause is not in order, though that could change in the coming weeks depending on the data."

Earlier in the session, oil futures got a leg up from shut-ins in Canada's oil-producing region of Alberta that has been battling devastating wildfires for nearly a month now. More than 2.7 million barrels (bbl) in daily oil production is located within areas of "very high" or "extreme" wildfire danger rating zones, according to an independent research firm Rystad Energy. Unusually high temperatures for this time of the year have aided to intense spring wildfires in the Western Canada, displacing thousands of people and destroying property. Satellite images show that toxic cloud of burned particles has blanketed the region and dipped across the border into the United States. "This is a very unusual pattern. We often don't see these types of patterns set up this early in the year. We see these patterns in the summer," said Terri Lang, a warning preparedness meteorologist for Environment and Climate Change Canada. According to weather forecasts, the heat wave is likely to intensify over the weekend, causing further damage to the communities and production fields.

At settlement, WTI futures for June delivery eased $0.31 to $71.55 bbl, and the international crude benchmark Brent contract softened to $75.58 bbl, down by $0.28 bbl. NYMEX RBOB June futures added $0.0078 to $2.5761 gallon, while ULSD June futures retreated $0.0404 to $2.3622 gallon.

Liubov Georges