Oil Futures Shrug Off Stocks Build, Rally as Default Risk Diminishes

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 settled the first trading session of June higher. The gains came after the U.S. House of Representatives passed a debt ceiling bill Wednesday night, a crucial step to avoid U.S. default that could have tipped the economy into a deep recession.

Stocks on Wall Street rallied, the U.S. dollar nosedived against global peers and oil futures jumped on the news that The Fiscal Responsibility Act cleared the House by a vote of 314-117 with bipartisan support. The legislation is now at the Senate, where passage is widely expected.

Markets remain jittery, however, on whether the debt ceiling deal would be done before a June 5 deadline set by the U.S. Treasury on when spending would reach the debt ceiling. Missing the deadline could trigger a selloff across equities and commodities if markets fear support for the legislation is unraveling. Otherwise, the expected passage of the bill by Congress would mark a rare moment of bipartisan action in an otherwise deeply divided Washington.

With the debt ceiling debate nearly in the rearview mirror, at least until 2025, investors are looking ahead to the Federal Open Market Committee June 13-14 policy meeting as another possible market catalyst. Philadelphia Federal Reserve President Patrick Harker said Thursday that the central bank is near the point "where we can hold rates in place and let monetary policy do its work to bring inflation to its 2% target."

Some Federal Reserve officials disagree and continue to push for more rate hikes as an insurance policy against the risk of reemerging inflation. Friday's Nonfarm Employment Situation report will likely be a key determining factor as to whether the Fed will decide for or against another increase in the federal funds rate. Currently, investors are pricing in a 70% chance for a pause in lifting rate at the FOMC meeting this month compared to a 23.8% likelihood for another rate hike. A strong employment report could trigger yet another wave of repricing in Federal Funds futures on CME.

Thursday's higher settlements in the oil complex came despite a mostly bearish inventory report released Thursday morning by the U.S. Energy Information Administration showing a 4.5-million-barrel (bbl) drop in commercial crude-oil stocks accompanied with a drop off in fuel demand leading up to the Memorial Day holiday. Commercial gasoline inventories declined only marginally by 206,000 bbl, and distillate stocks built by a larger-than-expected 985,000 bbl in the reviewed week. Demand for middle-of-the-barrel fuels fell below 4 million barrels per day (bpd) at 3.646 million bpd, and gasoline consumption declined to 9.098 million bpd, down by 339,000 bpd.

At settlement, U.S. dollar index plummeted 0.71% against a basket of foreign currencies to 103.502 after hitting a 2 1/2-month high 104.615 in the prior session. West Texas Intermediate July futures advanced $2.01 per bbl to settle at $70.10 per bbl, and the new front-month August Brent contract rallied to $74.28 per bbl, up $1.68 per bbl on the session. NYMEX RBOB July futures softened $0.0076 per gallon to $2.4362 per gallon and NYMEX ULSD futures rallied $0.0638 to $2.3147 per gallon.

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

Liubov Georges