Crude oil prices could stage the second consecutive bearish weekly close after the historic collapse of the Silicon Valley Bank continues to weigh on markets and sparked concerns over broader implications on the US economy.
Crude oil prices are trading below $75 a barrel with the bears determined to force a close below $73.50 - a level that hosts important near-term support. A break of this level could see crude oil prices test 15-month lows near $70, as well as the zone around $66.
The SVB Drama Dominates Market Sentiment
On Friday, the U.S. regulators, including the Federal Reserve and the Treasury Department, stepped in and shut down the SVB, marking the biggest banking failure since the global financial crisis in 2008. The abrupt closure of SVB led to investor concerns over potential risks to other banks due to the rapid rise in interest rates over the past year.
"We see Monday’s developments around the regional U.S. banks as more noise than news for commodity markets, and it should not have any meaningful medium- to longer-term impact," said Carsten Menke, an analyst at UBS.
Two days later, the regulators also closed down Signature Bank (NASDAQ:SBNY) SBNY, citing “systemic risk.” The regulators said all depositors of both banks “will be made whole.” The unexpected closures triggered speculations about what the Fed will decide at its next policy meeting, in terms of interest rate hikes.
"It was kind of surprising today to see the big drop in oil considering the fact that the Fed more than likely will have a harder time raising interest rates aggressively and that should cause weakness in the dollar," Price Futures Group analyst Phil Flynn said.
The uncertainty around the banking crisis marks the latest blow to the oil market, which has been battered this year by worries about the Fed’s monetary policy tightening and China’s optimism about its economic recovery.
Macro Headwinds Weigh on Oil but Market Remains Tight
Despite recent headwinds, numerous market participants remain bullish on the long-term outlook for oil, with the likes of Saudi Aramco (TADAWUL:2222) expecting consumption to hit a record high of 102 million barrels per day by the end of this year.
Saxo Bank head of commodities strategy Ole Hansen noted that crude oil prices continue to flirt with the general level of risk sentiment. While the response to the banking crisis will prop up commodities:
“The risk of a US recession has strengthened on the back of these developments and with that in mind the short-term outlook points to continued range bound trading.”
Oil investors have been paying hefty premiums for bearish put option setups as the SVB collapse urged some to hedge against the potential risk related to the oil price slump. Last week, the premium of puts over bullish speculations hit the highest level since November.
Credit rating provider Fitch Ratings also expects oil prices to appreciate over the following few years, citing implications of the persisting geopolitical tensions.
The agency hiked its oil price forecasts for 2024-2025, and now expects it will take more time for prices to rebound to their long-term levels because of supply constraints from Russia and OPEC+.
“The market is likely to remain tight over the medium term, given fairly low spare capacity and increasing demand,” the report stated.
Consequently, the ratings agency expects the broader differential between Brent and West Texas Intermediate (WTI) crude prices to remain around $5 per barrel through 2025, citing mounting shipping costs and market volatility. Fitch expects the differential to drop to $3 per barrel by 2026.
Meanwhile, the firm said its long-term oil price outlook remains unchanged, reflecting “falling long-term demand due to the energy transition.”
February CPI Numbers Come In Line with Expectations
Oil prices managed to stage a modest recovery on Tuesday afternoon after equities raced higher on the better-than-feared February CPI report. While the consumer price index (CPI) data for February met expectations, the markets are no longer pricing in a 50 basis points (bps) rate hike at the upcoming Fed meeting next week.
The consensus projections are now expecting a 25-bps raise, like at the previous two meetings this year. A weaker rate increase could weigh on the U.S. dollar, which is usually viewed as a bullish signal for oil prices.
This week’s U.S. CPI print showed that the annual inflation rate fell to 6% in February, in line with economists’ expectations, and representing the smallest year-over-year rise since September 2021. On a monthly basis, inflation rose by 0.4% from January, also in line with the estimates.
Meanwhile, China, the biggest oil importer in the world, saw its consumer inflation rate cool down to the lowest level in a year in February.
Summary
Oil prices hit 5-week lows earlier this week as the fallout from the collapse of SVB triggered a period of volatility across global markets. Still, commodity strategists remind investors that supply remains tight. This, as well as the shorter-than-expected hiking cycle by the Federal Reserve in the aftermath of the SVB collapse, could help oil prices recover in coming months.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.