Will oil markets defy a potential US debt default?


US Debt crisis
US Debt Crisis - 2023

With just ten days to go before the D-day, the decisive day or more aptly called default day, not only does the US place its reputation on the line, but also inadvertently pushes the rest of the world to the brink.

Unless an agreement is reached between the two major parties in the US, the Republican Party and the Democratic Party, over the new borrowing limit, the US government will run out of cash at the very beginning of June; with that, the government will not be able to pay its bills, wages of employees , welfare payments and of course, the  existing debt.

If it comes to that, the US, the world's largest economy and the only Superpower, will default on its debt for the first time in its history.

President Biden, in this context, wants to avoid it, as it may go down in history as 'Biden Default'; politicians do not want to leave toxic legacies behind when they leave office and President Biden cannot be the only exception.

As of May, 2023, the national debt of the US stands at a staggering $31.6 trillion, with the potential to go even higher; the Biden administration wants to borrow more in order to address the ballooning government spending. The limit set by, the debt ceiling, however, gets in the way of doing so, unless the Congress give its nod to raise the limit.

The Democrats wants to raise the ceiling so that the US can borrow more money for spending. The Republicans, by contrast,  oppose it on the grounds of the US being already heavily indebted. The two sides at present are at diagonally opposite corners while digging their heels without budging.  

The bone of contention between the two camps over the debt ceiling has already evolved into a full blown impasse.  The possibility of the first ever US default, although unthinkable a few years ago, now appears to be real.

The evolving developments at the Capitol Hill are being watched by the markets across the world. As far as the analysts of the energy markets are concerned, any potential US default will have serious ramifications on the oil and gas prices.

The gas prices, for instance, are already on the rise for 'inexplicable' reasons: the temperatures of Europe and north America are already in double digits; European gas reserves still remain robust; the possibility of demand spikes, in this context, is highly unlikely. 

A probable explanation is the role of speculators, the folks who love shorting, to make a killing on June 1, if the US goes for a default that will inevitably bring about a price crash.

As for the oil prices, both WTI and Brent remained below $80 during the whole week. The fact that the US inventories grew during the previous week clearly indicates the anxieties among the consumers are real, when it comes to spending. A debt default, in this context, is hardly a catalyst. 

US crude stocks May 2023
US Crude Stocks - EIA

Some economists believe if the US defaults on its debt, the effect will be just psychological and the initial reactions will die down with the markets limping back to normal in a few days. It is just hypothetical, though. The real impact remain to be seen, as we have never been in this scenario before.

As of Saturday, the chasm between the two major political parties remains pretty wide to be bridged, as both sides tightly hold onto their respective ideological pole, throwing a feasible compromise into the pit below.  

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