Oil futures: Crude rebounds 2.5% as US works to avoid debt default

Quantum Commodity Intelligence – Crude oil futures Wednesday rebounded strongly on hopes the US will reach an agreement on debt-ceiling levels, as markets shrugged off the Energy Information Administration's (EIA) latest report, which revealed a surprisingly high build in crude stocks.

Jul23 ICE Brent futures were trading at $76.83/b (1925 GMT), compared to the day's range of $74.26-$77.61/b and Tuesday's settle of $74.91/b.

At the same time, Jun23 NYMEX WTI was trading $72.69/b, versus Tuesday's close of $70.86/b.

Talks on increasing the US debt ceiling had weighed on financial markets amid warnings of a default as early as 1 June, but President Biden said Wednesday, "leaders have all agreed we will not default," indicating both sides of the House are working towards an agreement.

"We're going to come together because there's no alternative," Biden told reporters at the White House as talks to raise the nation's $31.4 trillion debt ceiling continue.

US commercial crude oil stocks jumped 5 million barrels in the week to 12 May, hitting a five-week high of 467.6 million barrels and defying market expectations of a drop in inventories as refinery throughput picked up.

Markets also shrugged off American Petroleum Institute data released late Tuesday, which showed a rise in US commercial crude inventories of 3.7 million barrels last week, as the crude build was partially offset as API figures showing gasoline stocks fell by 2.45 million barrels, while distillate stocks posted an 800,000 barrel draw.

Crude earlier found support following the IEA's upwards demand revision with global oil demand set to increase by 2.2 million bpd to an average of 102 million bpd this year, up from 2 million bpd in April's report, although this was countered by output hikes from Russia, Iran and Venezuela output.

Prices were also given a leg up after White House energy adviser Amos Hochstein confirmed the US plans to buy more crude oil to refill the SPR after an initial 3 million barrel tranche was announced earlier this week.

"This is the beginning. Later this year, we'll continue to buy more and significantly more than that into next year," Hochstein told CNBC.

Debt ceiling

Talks on increasing the US debt ceiling are likely to keep markets volatile, while further disappointing data from China this week added to the mixed sentiment.

"The risks remain tilted to the downside amid a sluggish recovery in China, uncertainty around the US economy and banking system, and the impact of much higher interest rates on demand," said Craig Erlam, senior market analyst at OANDA.

"The primary bullish case for oil prices comes from OPEC+ and the prospect of another output cut in a couple of weeks but even that has been downplayed. Perhaps Brent has simply consolidated for now in a $70-$80 range," added Erlam.

Weaker data from China this week was largely brushed aside, as figures showed industrial production increased 5.6% y-on-y in April, undershooting forecasts that called for a double-digit percentage rise.  

Alexander Kuptsikevich of FxPro Financial Services said: "Disappointing data is more a manifestation of economic inertia than a sign of weakness. Assuming that the problem is simply one of the inflated market expectations, the situation in China looks much better than in most developed countries."