1. Crude oil prices have fallen for three days in a row, and today they dropped by another 2% during trading. Market risk appetite has improved, however, after 11 big Wall Street banks bailed out First Republic Bank and positive US economic statistics. WTI crude oil gained 0.01% to close at $68.22 per barrel, while Brent crude oil gained 0.28% to close at $74.6 per barrel.
2. both Saudi Arabia and Russia have stated that they will adhere to the OPEC+ agreement to reduce output.
3. the Federal Reserve has used its discount window more in the past week than it did during the height of the financial crisis, and its balance sheet has increased by US$300 billion to US$8.69 trillion, the same amount it was at in November of last year.
4. the First Republic Bank received $30 billion in deposits from eleven major U.S. financial institutions. It was met with approval from the government agencies in charge of the financial sector. As Powell noted in his remarks, this demonstrates the robustness of the financial system.
5. Credit Suisse is planning to buy up to 2.5 billion U.S. dollars in dollar-denominated bonds and up to 500 million euros in euro bonds due in 2023 and 2024 using funds raised from the Swiss National Bank’s liquidity facility. Upon receiving adequate security, the SNB has verified that it will provide funding to Credit Suisse.
6. According to the Joint Oil Database (JODI), the International Energy Forum (EF) reported that in January, Saudi crude oil output rose by 18,000 barrels per day, to 10.45 million barrels per day.
These factors contributed to the gasoline price collapse alongside the financial catastrophe. Some investors may wonder why a financial crisis would have such a dramatic effect on oil prices, given that the price of Brent crude has dropped by more than $10 per barrel in recent days. Has the potential to influence petroleum energy demand and supply. However, when market instability is high, buyers often sell risky commodities like gasoline and buy more stable investments. Lacking structural backing and with U.S. crude oil stockpiles continuing to rise, oil prices are highly susceptible to shifts in risk mood. Delta trading on the futures markets has also contributed to the drop in oil prices. Put options on negative security instruments are commonly sold by financial organizations to oil market players like oil suppliers. Due to the need to eliminate price risk on their balance sheets as a result of oil prices dropping below the level (strike price) at which safety measures went into action, these financial institutions have resorted to selling crude oil contracts.
Despite a current decline, crude oil’s basics suggest it will eventually recover.
Brent crude prices dropped more than 10%, dropping below $75 a barrel for the first time in over 14 months after the insolvency of Silicon Valley Bank and a fresh round of worries about Credit Suisse. Market risk mood has taken a major hit as a result of widespread reluctance to risk due to concerns about the stability of the U.S. financial sector and the economy as a whole. The financial system’s authorities are currently preventing dangers from spreading to other sectors. The entirety of Silicon Valley Bank is included in these metrics. Guaranteed deposits and a new Federal Reserve loan tool will increase the available capital to qualified financial institutions. Joe Biden, the Vice President of the United States, has also promised to take action to mitigate the situation. However, the market now anticipates that the Federal Reserve will only increase interest rates by 25 basis points in March, down from 50 basis points before these occurrences. That makes the business climate for the petroleum energy market very unstable. Between now and the Federal Reserve’s rate decision on March 22nd, oil price fluctuation is predicted to stay high. We still see negative threats to oil prices, but this is likely to be short-lived as better factors increasingly support petroleum price increases.
The possibility exists that global economic growth will slow down much sooner and by a much larger margin than anticipated due to the fact that bank liquidity risks have increased credit risk, market volatility has climbed abruptly, and badly diminished risk appetite. This implies that the rest of the year will see slower increase in demand, and that stockpiles will end up being greater than anticipated early this month. As such, the dramatic reversal in petroleum oil prices is hardly surprising. Oil prices are likely to move far below what factors indicate, with a decline to $60 or slightly lower completely conceivable, due to systemic risk worries, de-risking, and attempts to increase portfolio liquidity, which have significantly increased market volatility. Oil costs could fall even further if there were a full-scale banking catastrophe.
Despite the super-sharp decline and the potential for another steep drop, we have not abandoned our long-term optimistic view for oil prices. We believe that crude oil prices will continue to rise in the long run, despite the fact that it is difficult to predict what will happen in the near term with respect to monetary policy and financial risk, or how worried investors will be with respect to the demand forecast. Central banks may intervene to steady the financial system and inculcate confidence over time, as they have done many times before during crises of trust. Meanwhile, OPEC will likely alter production levels to steady the market, as it has done since the outbreak. And despite difficulties in the West, Chinese consumption is expected to increase by 1.2–1.5 million barrels in the coming six months. Therefore, an increase in WTl crude oil price to $90 before the year is out is still conceivable.
Researcher Ole Hansen of Saxo Bank
Due to a deteriorating fundamental picture, oil investors are cutting positions.
The danger of a mismatch in speculative holdings was highlighted by the 11% drop in Brent petroleum oil prices over the course of three days. Hedge funds’ net long position has increased by a factor of three since November, when volatility was higher but backwardation was lower. The week of March 7 saw a 16-week peak in total long contracts of 320,000, while a 12-year low in total short contracts of 220,000 led to a long/short ratio of 14.5. When the trend support at $81.70 was broken, this triggered a rush of long selling that only accelerated the fall. Still, the oil market’s instant backwardation (a sign of high demand and low supply) was at 44 cents, down only barely from 60 cents the week before. This suggests that the market’s basics haven’t changed significantly. We attribute the recent drop in oil prices primarily to position liquidation, and unless the economy exhibits further symptoms of contraction, we anticipate renewed purchasing once security is returned.
There may be more short selling and a continuation of long liquidation by some funds as a result of the recent drop because it has altered the short-term fundamental picture. However, historical evidence suggests that it is challenging to assume a short strategy when the market is in backwardation, because the negative potential may not be completely achieved.