Oil prices drop due to the banking crisis

Oil prices have tumbled to their lowest levels in more than a year this week. Crises in the banking sector, spurred by the collapse of Silicon Valley Bank (SVP) on Monday, unsettled financial markets and stoked fears for the broader economy. Brent crude, the global energy benchmark, slipped to settle at $73.69 a barrel on Wednesday.

By Wednesday, all attention was on Switzerland-based Credit Suisse which was the latest bank to become embroiled in the turmoil, with its shares plunging by 24 per cent and impacting wider banking stocks across Europe and the U.S., all of which came under heavy selling pressure.

With growing uncertainty in the banking sector, commodity traders fretted that the potential contagion in the financial markets would feed into the physical economy, cutting consumer spending and knocking oil demand.

“This is related to concerns about the economic growth outlook following from the stress you see on the financial sector,” said Greg Sharenow, a Portfolio Manager at Pimco. “That has been the catalyst and the spark.”

Oil’s decline was accentuated through the forced selling by speculators who had built up bets on higher prices in recent weeks, analysts said. Traders had become more bullish in the belief that Chinese fuel demand would recover just as Russian oil exports began to wane in response to strengthening sanctions over its invasion of Ukraine.

“Bullish bias had been building, but no one was planning for a banking crisis. Last week, no one was talking about European banks,” said Rory Johnston, who runs Commodity Context, a market research service. “Now it’s all about Credit Suisse.”

Reports of rising oil inventories in developed countries, which is an indicator of weakening consumption, added to the bearish sentiment.

On Wednesday, the International Energy Agency said rich-country oil stocks had surged to an 18-month high in January, pointing to “still lacklustre” global demand. Ed Morse, Global Head of Commodities Research at Citigroup, said oil markets in recent weeks had been “looser than people thought”, leaving bullish traders exposed to a reversal. However, the sell-off had turned into an overcorrection. He added that “there is nothing on the horizon that says we have a massive surge in supply or a massive drop in demand coming making the outlook extremely uncertain in the short term.”


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