West Texas Intermediate (WTI) prices slid on international markets last night as the U.S. government partially shutdown for the first time in seventeen years. As the Congress debate on the budget ended in a deadlock, the constitution imposed a shutdown of non-essential federal services and agencies until the issue is resolved.
The shutdown came at a time when oil prices are already extremely sensitive to political changes across the world. WTI fell 71 cents since yesterday through the night as the market anticipated the shutdown.
Figure 1: West Texas Intermediate (WTI) Intraday Trade Price (USD per barrel)
As the deadline drew near, panic about the slow economic activity in the U.S. caused the market players to opt for a bearish sentiment in the U.S.’s primary crude market. By midnight, the parliament was still in a deadlock over the budget and the White House ordered federal departments to shut down their non-essential operations. The government was unable to agree on the funding bill due to the humongous disagreement on the debt ceiling issue.
The partial shutdown placed more than 800,000 federal workers on unpaid leave, which means that the economic activity of these people ceased completely. Many departments, including the Internal Revenue Service (IRS) and Environmental Protection Agency (EPA) were shut down, as well as all the national parks and museums.
Government shutdown impact
The shutdown results in a decline in economic activity and a decline in the demand for oil. The stockpiles of the country of petroleum products may rise as a result.
“The government shutdown will not last long, it’s likely to be resolved,” said Ed Morse, head of global commodities research at Citigroup Global Markets Inc. in New York. “The debt ceiling is a bigger deal for the entire global economy. It could have a dramatic impact on global growth.”
However, the short-term impact of this sudden news was enough to pull down the market. This further fueled the already deflationary impact of the U.S. Iran talks where Iran could face possible decrease in sanctions.
“Iran’s economy has been crippled by a series of UN and US sanctions aimed at bringing an end to its nuclear program, which the West claims is being used to develop nuclear weapons. Iran denies the assertion. Going forward, if sanctions are eased, resulting in increasing exports from Iran, oil prices will continue to be pressured,” reports Business Inquirer.