1. Progress on the US debt ceiling issue
According to people familiar with the matter, a stripped-down version of the U.S. debt ceiling agreement has taken shape, with the gap between the two sides’ discretionary spending proposals less than $70 billion, and Republicans willing to make concessions on defense spending. McCarthy said that no agreement was reached on Thursday and that the weekend will be overtime. The Treasury Department is already preparing contingency plans in case the debt ceiling is breached.
The Treasury’s cash balance fell to $49.5 billion on Wednesday, down from $76.5 billion the previous day and $140 billion on May 12, according to Thursday’s data. If the debt ceiling is not lifted or raised in time, the federal government could run out of money early next month.
Following Fitch, DBRS Morningstar placed the US AAA rating on Negative Watch. Moody’s said that June 15 is crucial to the AAA rating of the United States. If the government cannot pay interest by then, the agency will downgrade the US rating by one level from AAA to AA1.
2. Fed-related
The number of people filing for unemployment benefits in the United States recorded 229,000 in the week ending May 20, far below expectations and a new low since the week of April 22, 2023; at the same time, the annual rate of GDP in the first quarter was revised up from 1.1% to 1.3%.
After the release of the data, the swap market fully priced in a Fed rate hike of 25 basis points before the July meeting. The possibility of raising interest rates by 25 basis points in June has exceeded 50%. By the end of the year, the interest rate will be cut by about 37BP to 4.95% from the implied peak rate. .
Boston Fed President Collins said the Fed may be at or near a point where it will pause interest rate hikes, and she also commented on the debt ceiling that not raising the debt ceiling could do a lot of damage
3. According to Russian media reports, Russian Deputy Prime Minister Novak believes that there will be no new measures at the OPEC+ meeting on June 4, but if necessary, OPEC+ will jointly reach a consensus and take measures. He expects Brent crude prices to exceed $80 a barrel by the end of the year.
4. According to data from the Saudi government, Saudi oil exports in March fell by 26.5% year-on-year.
5. On Thursday, Russia moved ahead with plans to deploy tactical nuclear weapons in Belarus. The Russian Foreign Ministry stated that only when the United States and the West give up undermining the security of Russia and Belarus, Russia will consider withdrawing. Responding to earlier controversy, the top U.S. military general, Milley, said he was unsure whether Ukraine had used U.S. weapons in Russia.
6. Suez Canal service provider Leth tweeted earlier Thursday that a cargo ship ran aground in Egypt’s Suez Canal and tugboats were trying to refloat it.
MARKET VIEWPOINTS
FX Empire
WTI crude oil fell overnight and returned to the support of the trend line below the triangle pattern. It was hovering near the top of the just broken triangle pattern before. The question now is whether the bulls will come back. Not far above the current high point of oil prices is the 50-day moving average, which is a technical indicator that many people will pay attention to. If oil prices can break above the 50-day moving average, there is a possibility of testing the $75 level, followed by the 200-day moving average just below $80. Conversely, if oil prices turn around and turn lower from here, then oil prices could find support around $70, an important round-number psychological hurdle.
The situation is similar for Brent crude oil, the market may regard the lower level of $70 as a support level, but if the 50-day moving average is broken, the $80 level may be broken, and the market is likely to move towards the 200-day level slightly below $85 On par with the moving average. Then if the economy slides into a severe recession, oil demand will likely fall. But the $70-85 level will be seen as an overall range for the summer, as oil prices are usually range-bound during the summer, after all.
Reuters columnist John Kemp
Saudi Arabia and its OPEC+ allies have struggled to stem downward pressure on oil prices since they began scaling back production targets in September and October 2022. But a slowing business cycle in major economies has created significant downward pressure, which OPEC+ has had only limited success in offsetting.
Typically, when OPEC curbs production, front-month crude futures prices and calendar spreads typically rise until the discipline to cut production within the group begins to loosen. However, the reality of the day is that crude oil prices and spreads continue to weaken despite multiple announcements that production is below target. In early October 2022, front-month Brent crude oil futures were trading around $90 a barrel, while the six-month delivery spread was in a backwardation of nearly $8. Since then, OPEC+ members have cut their common target by nearly 3.6 million barrels a day, but oil prices have fallen to $78 a barrel in recent months, and the spread has dropped to around $2.
However, OPEC+ production cuts have prevented a large build in oil inventories and a sharp drop in prices and spreads, although these measures have not been enough to boost them. But by preventing a large build-up in global oil inventories, OPEC+ is setting the stage for a faster rebound in oil prices later in 2023 or 2024. But the continued rise in oil prices and spreads has yet to be combined with a combination of lower Russian oil exports and/or an improving economic environment.
OPEC+ Conference Prospects
Comprehensive market commentary, OPEC+ leader Saudi Arabia and Russia have sent conflicting signals on oil policy that the group may not agree on new measures next week, doing little to improve the deteriorating sentiment in the crude oil market. On Tuesday, Saudi Arabia’s energy minister warned short-sellers in the crude market to be “careful,” fueling speculation of a new round of output cuts. Oil prices initially rose as a result of expectations that this meant OPEC+ would announce additional production cuts at its June 4 meeting, though gains were pared back as suspicions emerged. Traders see little need for OPEC+ to intervene as oil prices are already near $80 a barrel and increased demand will tighten the oil market.
Prospects for further cuts by OPEC+ took a further hit on Thursday, when Russian Deputy Prime Minister Novak said the 23-member coalition was unlikely to agree on new measures next week. Russia, which of course needs oil revenues to fund its military operations in Ukraine, has so far struggled to implement the production cuts it announced months ago, and further cuts may not be tolerated on that basis.
The Saudis and other Gulf exporters may decide to act without Russian support, but they may be reluctant to do more given that they have shouldered much of the burden of propping up the oil market this year.
The rhetoric between Saudi Arabia and Russia is a replay of positions the two sides have taken since the formation of OPEC+ six years ago, with Saudi Arabia poised for action and Russia arguing for a more moderate stance. As far as the upcoming meeting is concerned, this will certainly strengthen expectations that OPEC+ will stick to the status quo and serve as a warning to the oil bulls.
HFI Research
The EIA data released yesterday is obviously optimistic, but there are still countless reasons for the market to be skeptical about oil prices, such as the debt ceiling, Chinese demand, and Russian exports. The reality is that oil market data continues to be bullish for oil prices. On top of that, the weakness in crude oil demand that started last April has turned to an upward trend. Four-week implied U.S. crude oil demand is now well above 2019 levels and above 2021 and 2022 levels. Implied crude oil demand is expected to continue to move higher in the coming weeks, driven by gasoline and jet fuel. And by the end of the year, demand for gasoline, distillate and jet fuel will be near 2019 levels. In our view, given the disappointing demand data from last April, current refinery throughput may not be sufficient to meet the imminent pickup in demand.
The good news though is that more than 2 million barrels per day of refining capacity will be added this year, so we won’t see refining margins soar like last year. But that doesn’t mean margins won’t improve, which will still ultimately lead to more crude buying. If this factor is combined with OPEC+ production cuts and higher oil prices could be higher in the future.
In terms of oil market balance, crude oil inventories began to decline in mid-May, and the EIA data released yesterday also proved this point. For crude oil bulls, this trend needs to continue. In addition, we expect the oil market gap to reach 1 million barrels per day in June, and the average gap in the second half of 2023 to reach 1.25 million barrels per day. Once that happens, oil price skeptics will have no choice but to admit that the oil market deficit is back and that they were too pessimistic about oil prices before
