Oil Drops as Inflation Fears Offset Progress on Debt Limit

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 declined in early trading Tuesday morning, sending West Texas Intermediate below $72 barrel (bbl) as concerns over persistent inflation in the United States have offset progress reaching a debt ceiling agreement with the U.S. Congress set to vote on a tentative deal as early as Wednesday.

Oil futures had initially gained on optimism that the deal reached Sunday between President Joe Biden and House Speaker Kevin McCarthy would end the prospect of U.S. default. However, opposition to the agreement has emerged almost immediately from Republicans who say spending cuts don't go far enough and Democrats who say they are too severe. Congress is set to vote on the legislation as early as Wednesday. A peculiar detail of the deal is that it doesn't raise the debt ceiling but suspends it entirely until 2025, allowing the federal government to continue borrowing through the presidential election year.

As of Tuesday morning, markets have judged a deal is a step in the right direction, with futures contracts tied to Dow Jones Industrials indicating a 100-point gain at the opening bell and S&P 500 futures advanced 0.58%. The U.S. Dollar Index slipped against a basket of foreign currencies to trade near 103.975, but optimism over a tentative agreement failed to lend sustainable support for the oil complex.

Near 7:30 a.m. EDT, West Texas Intermediate futures for July delivery fell $0.93 to $71.76 bbl, and ICE July Brent, the international crude benchmark, dropped back by a steeper $1.27 to $75.81 bbl. NYMEX June RBOB futures declined $0.0344 to $2.6690 gallon, and June ULSD futures moved down $0.0213 to $2.3480 gallon.

Dragging the complex lower are persistent concerns over a persistent inflation trend in the United States and the Federal Reserve's next step to cool off sticky price pressures stemming from consumer spending. Figures released Friday showed the Personal Consumption Expenditures Index, the Fed's preferred inflation measure, accelerated to 0.4% in April while the consumer spending index shot up 0.8% after just a 0.1% gain in the prior month.

Core PCE, which excludes the energy and food categories to provide a less volatile picture of underlying inflation, increased at an even faster rate of 4.7% over the last 12 months. That is a problem for Fed officials who voiced their concern earlier this month over the slow pace of disinflation, particularly in the services sector. Services continue to be the major driver of U.S. inflation, with core PCE stuck just under 5% for the past six months.

The April reading for inflation comes at a time when investors are increasingly worried if the central bank will again hike the federal funds rate at their June 14 Federal Open Market Committee meeting.

As of Tuesday morning, investors see a 60.7% likelihood FOMC will raise the federal funds rate by another 0.25% next month to a 5.25% to 5.5% target range to be followed by a pause at their July 26 meeting. This week, Richmond Federal Reserve President Tom Barkin and Philadelphia Federal Reserve President Patrick Harker will speak at the National Association for Business Economics to give an update on the central bank's view of inflation and risks for the economy.

Liubov Georges can be reached at liubov.georges@dtn.com .

Liubov Georges