- Banking chaos is weighing on oil prices, as crude benchmarks hit their lowest levels since December 2021.
- Fed policy and US and European bank turmoil have darkened the global economic outlook in the last week.
- Brent crude has dropped roughly 10% since regulators shut down Silicon Valley Bank.
Turmoil across the global banking system is dragging on oil prices, with both major crude benchmarks on Wednesday hitting their lowest levels since December 2021, before paring some losses Thursday.
West Texas Intermediate hovered at about $67 a barrel Thursday, while Brent crude, the international benchmark, moved below $74. Thursday’s moderate price gain marked the first uptick after three consecutive days of losses.
A week ago, the US benchmark was nearly 12% higher, and global crude traded about 11% higher.
WTI prices are down about 29% from a year ago, shortly after Russia invaded Ukraine.
On Friday, regulators shut down Silicon Valley Bank, and two days later did the same to Signature Bank. Silvergate Bank, meanwhile, wound down operations a few days earlier.
Now, Credit Suisse faces trouble despite a $54 billion lifeline from the Swiss National Bank, and First Republic Bank, which this week was downgraded to “junk” by S&P and Fitch, is looking at a possible sale.
“On a more granular note: the price fell quickly, and it fell a lot, because market actors and traders had broadly expected the price situation this quarter to strengthen, based on recovering Chinese demand and generally good economic forecasts,” Gregory Brew, oil analyst at Eurasia Group told Insider. “So these recent events have shaken those expectations.”
Meanwhile, for the week ending March 10, EIA data showed that US oil stockpiles grew more than expected, which suggests economic activity is slowing down as the Federal Reserve’s monetary policy tightening weighs on growth prospects.
Still, given China’s reopening, oil demand is still expected to strengthen, according to Brew, although crude could face further downward pressure if the banking crisis doesn’t subside.
Policymakers in the last year have hiked interest rates 1,700%, though the banking meltdown has fueled speculation for a pause or a smaller rate hike at the March meeting. Markets are slowly adapting to new concerns about macro risk, DataTrek Research cofounder Nicholas Colas wrote in a Thursday note.
“The US economy went into the current crisis with some decent momentum,” Colas said. “That, and lower oil prices/interest rates may soften the economic blow of tighter lending standards.”