Oil down 1%, US debt caution offsets supply worries

May 22 (Reuters) – Oil prices slipped on Monday as caution around US debt ceiling talks and concerns about demand recovery in China offset support from lower supplies from Canada and OPEC+ producers.

Brent crude futures LCOc1 fell 73 cents, or 0.97%, to USD 74.85 a barrel by 0634 GMT, while US West Texas Intermediate (WTI) crude CLc2 for July delivery, the more actively traded contract, slipped 73 cents, or 1.02%, to USD 70.96.

The June WTI contract CLc1, which expires later on Monday, fell 87 cents to USD 70.68 a barrel.

“I expect plenty of volatility in the coming days and a bounce upward in crude prices as and when a deal is reached to raise the debt ceiling,” said Vandana Hari, founder of oil market analysis provider Vanda Insights.

“But crude’s headroom thereafter will be limited as other economic headwinds return to the center stage,” she added.

Weak economic data reports from China in recent weeks have sparked concerns about demand in the world’s top crude importer and No. 2 oil consumer, analysts said.

Last week, both oil benchmarks gained about 2%, their first weekly gain in five, after wildfires shut in large amounts of crude supply in Alberta, Canada.

The impact of voluntary production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies including Russia, known as OPEC+, is also being felt after going into effect this month, analysts from Goldman Sachs and JP Morgan said.

Total exports of crude and oil products from the group plunged by 1.7 million barrels per day (bpd) by May 16, JP Morgan said, adding that Russian oil exports will likely fall by late May.

On Saturday, the Group of Seven (G7) nations pledged at its annual leaders’ meeting to enhance efforts to counter Russia’s evasion of the price caps on its oil and fuel exports “while avoiding spillover effects and maintaining global energy supply” but did not provide details.

Such enhancements are not expected to change the supply situation for crude and oil products, the International Energy Agency’s (IEA) Executive Director Fatih Birol said, adding that the agency was sticking to its analysis for now.

In its latest monthly report, the IEA warned of a looming shortage in the second half when demand is expected to eclipse supply by almost 2 million bpd.

“It remains to be seen if the new curbs will impact Russian oil production as the Russians have been very effective in finding ways around European and US sanctions and the sanctions have proved difficult to enforce,” IG’s Sydney-based analyst Tony Sycamore said.

The US oil rig count fell by 11 to 575 in the week to May 19, the biggest weekly drop since September 2021, energy services firm Baker Hughes Co (BKR) said.

“A slowdown in US drilling activity is a concern for the oil market, which is expected to see a sizeable deficit over the second half of this year,” ING said.

(Reporting by Florence Tan in Singapore and Mohi Narayan in New Delhi; Editing by Himani Sarkar and Christian Schmollinger)