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How Low Can WTI Crude Go?

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WTI crude prices once again broke below the $70/bbl mark. This time, it closed below that level for the first time in nearly a month. After the US close, a brief rally was cut short by China PMI’s. This comes ahead of the pivotal OPEC+ meeting that will happen over the weekend. What else is weighing on the price of crude?

Not much of a recovery

Two weeks ago, the US announced that it would start buying oil to replenish its strategic reserves. This was highly anticipated, since the government had initially said it would start buying at $70/bbl. But, that announcement was for bids that wouldn’t be filled until August. In the meantime, the government continues to sell out of the SPR.

Another hiccup in the price of oil was a drop in demand over the weekend. Inventory was drawn down to supply stations in anticipation of the surge in demand that’s normally seen on Memorial Day weekend. That usually marks the start of the US “driving” season. However, demand was down 1.3% compared to prior year. Americans are driving less, as storm clouds brew over the US economy.

The debt relief isn’t here yet

Politicians were running out the clock on finding a deal to raise the debt ceiling. The initial positive reaction to the deal announcement over the weekend gave way to concern over the lengthy, politician and bureaucratic process of actually passing the 99-page bill. Although both he White House and congressional leaders are optimistic about the bill’s passage, there are quite a few strident voices who oppose it.

Chances are that it does pass in time, but the market might rather stay on the sidelines until the confirmatory vote is in. The deadline is now June 5th for when the US government is expected to run out of money. The bill is expected to be voted on by the House today, and make it out of the Senate by Friday, allowing just two non-business days to spare.

OPEC+ troubles are brewing

Meanwhile, on the weekend OPEC+ will meet in person in Vienna, which is usually a sign that there will be an attempt to make changes to the existing production agreement. The two big players, Saudi Arabia and Russia, are reportedly at odds. Russia keeps maintaining production despite promises to cut, inciting the ire of Saudi Arabia trying to reduce production to bolster prices. The impasse could potentially lead to no cuts being announced, despite slowing global demand.

Chinese Manufacturing PMIs last night were the latest sign of slowing global economic activity. Chinese industry marked a second consecutive month of contraction. A few hours earlier, the Dallas Fed survey showed that industrial demand in the US fell at a much larger rate than expected. The two largest oil buyers (the US is the largest consumer, China is the largest importer) are showing signs of economic weakness, which could mean the forecasts of higher demand this year might not be accurate.

In the face of this, the Fed is now expected to continue hiking, which would support the dollar and raise worries of tightening into a recession. Friday’s jobs numbers are seen as pivotal for defining expectations of what the Fed will do at its next meeting.

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