Crude oil market outlook darkened by debt ceiling debacle and recession risks

Crude oil prices (as measured by West Texas Intermediate front-month futures) retreated on Friday, settling slightly above $70.00 per barrel, and closing lower for the fourth consecutive week, dented by growing fears of a US recession and its adverse effects on cyclical commodities.

Although the US is not yet in recession, market indicators, such as the inversion of the yield curve, suggest that one could arrive soon. Granted, the outlook remains fluid and subject to change, but the recent turmoil in the US banking sector has reinforced downside risks, increasing the likelihood of a downturn later this year.

The US has the world's largest GDP, so a recession could severely curtail global growth, reducing demand for fossil fuels across the board. This could have a detrimental impact on oil prices, with most losses possibly concentrated at the beginning of the slump, given markets’ forward-looking nature.

The US debt ceiling debacle is making matters worse for energy commodities.

While the US hit its debt limit in January, the Treasury Department has been able to continue paying its bills by employing extraordinary measures, but available cash could run out as soon as early June if the federal government fails to take corrective action.

If the country's borrowing cap is not raised soon, a default could occur in a matter of weeks, triggering catastrophic consequences for the economy and the financial system. Most likely, Democrats and Republicans will reach a deal at the eleventh’s hour, but that may only happen once markets begin to convulse and fall off the cliff.

In the current environment, oil prices will remain subdued, meaning more losses could be on the horizon. With sentiment on thin ice, market conditions could become quite treacherous in the blink of an eye, so traders should carefully monitor headlines in the coming days to prevent being caught on the wrong side of the trade.

Crude oil technical analysis

In terms of technical analysis, WTI oil is sitting above trendline support near the $70.00 mark after recent losses. If bulls fail to defend this floor and sellers drive prices below it decisively, a deeper decline toward $66.00 could be in the making. On further weakness, bears could challenge the 2023 lows.

On the flip side, if prices rebound from current levels, initial resistance appears at $72.00. A successful move above this barrier could open the door for a rally toward $73.75, followed by 76.50.

Crude oil prices technical chart

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