Oil slips as debt talks pause, Fed warns of high inflation

By Arathy Somasekhar

HOUSTON (Reuters) -Oil prices reversed course to fall on Friday after U.S. House of Representatives Republicans and President Joe Biden’s administration paused talks about raising the government’s debt ceiling, threatening a default that could cut energy demand.

Brent futures were down 62 cents, or 0.8%, at $75.22 a barrel by 1:10 p.m. ET (1810 GMT). West Texas Intermediate U.S. crude for July expiry fell 64 cents, or 0.9%, to $71.30.

The less active U.S. crude contract for May, due to expire on Monday, slipped 72 cents, or 1%, to $71.09.

Brent and U.S. crude were nonetheless set to notch their first weekly gains in a month.

Biden and House Republicans have little time to agree on a deal to raise the federal government’s $31.4 trillion borrowing limit or risk a catastrophic default. The Treasury Department has warned the government could be unable to pay all its bills by June 1.

A White House official said a deal remained possible.

Markets were also spooked by Federal Reserve Chair Jerome Powell’s comments that inflation was “far above” the Fed’s objective, adding no decisions had been made yet on the next interest rate action.

“It doesn’t look they are going to get the debt deal done today… the chance of a 25 basis point (rate) increase in the June meeting is rising by the day… There’s not a lot for the bulls to hang their hats on,” said Mizuho analyst Robert Yawger.

Following reports of the debt ceiling negotiations and Powell’s comments, U.S. stocks, Treasury yields and the dollar all moved lower.

Providing some support for markets, U.S. Treasury Secretary Janet Yellen reaffirmed the strength and soundness of the country’s banking system in a meeting with bank CEOs on Thursday, the Treasury Department said in a statement.

U.S. oil rig count, an indicator of future production, fell by 11 to 575 this week, the biggest weekly drop since September 2021, energy services firm Baker Hughes Co said. [RIG/U]

While the potential for additional rate hikes increases concern about demand weakness in the United States, prices could rise on higher Chinese demand throughout 2023, said analysts from National Australia Bank.

China’s oil refinery throughput in April rose 18.9% from a year earlier to the second-highest level on record, data showed this week.

Chinese refiners maintained high runs to meet recovering domestic fuel demand and build stockpiles ahead of the summer travel season.

(Additional reporting by Noah Browning in London, Jeslyn Lerh in Singapore; Editing by Tom Hogue, Jason Neely, Louise Heavens, Barbara Lewis, David Gregorio and Jan Harvey)