What is the US debt ceiling deal and how is it affecting oil prices?

Ahead of the OPEC+ meeting on June 4, the oil market sentiment has dampened over worries of the US debt ceiling agreement has offered a relief rally and cooled down investor's temperament to take risks. US President Joe Biden and House Republicans reached a deal on Sunday to raise the government's debt ceiling and avert a devastating default, which could have a ripple effect on the banking and world economy. 

After days of long and tedious discussions, the deal allows both sides to claim a victory of sorts. Biden called it a "compromise" while Republican House speaker Kevin McCarthy described it as "worthy of the American people." The 99-page text was released Sunday night and the agreement will be subject to scrutiny and debate in the coming days. The deal is yet to be approved by a divided Congress.

Also Read: Oil declines 2% over US debt deal uncertainty, OPEC+ outcome on June 4

What is the US debt ceiling deal?

Known as the Fiscal Responsibility Act of 2023, the bill provides for an increase to the debt ceiling of $31.4 trillion for two years, which means President Joe Biden will not need to negotiate it again before the November 2024 presidential election.

The deal also places limited curbs on government spending that will please some Republicans, but it does not deliver the big cuts that right-wingers wanted and which progressive Democrats would have balked at. The deal holds nonmilitary spending roughly flat for the 2024 fiscal year from this year. It also limits the increase by one percent for 2025, according to the proposed bill.

The agreement preserves plans by the Biden administration to increase spending for the military and veterans in line with inflation as well. The deal also pares back funds allocated for the expansion of the Internal Revenue Service (IRS). Last year, Congress had approved $80 billion for the IRS to boost tax enforcement. The debt ceiling agreement pulls back $10 billion to spend in other areas.

On the labor front, the deal establishes work requirements for people who are receiving federal food assistance or on family welfare, in a victory for the Republican side. It is set to raise the age at which childless adults will be required to work to receive food stamps from 49 to 54. As a concession to Democrats, the deal relaxes the requirements for veterans and the homeless.

How is the deal affecting oil prices?

Concerns about the viability of raising the US debt ceiling are affecting oil prices. A few Republican lawmakers have expressed opposition to the deal, while President Joe Biden and House Speaker McCarthy remain optimistic about its passage. Republicans have argued that steep spending cuts are necessary to curb the growth of the national debt, which at $31.4 trillion is roughly equal to the annual output of the economy.

The final agreement must be approved by a divided US Congress before June 5 - the deadline set by the Treasury Department for meeting the financial obligations. The uncertainty is keeping investors on their toes and creating a stand-off, according to Reuters.

A default would take currency markets to places “the world’s not seen before” and that in turn would affect energy prices and trading as most of the crude oil is exchanged using the US dollar, according to S&P Global Commodity Insights “It will likely lead to severe recessions, which again will have an impact on energy consumption and demand,'' it added.

With inputs from agencies