Oil prices have tumbled to their lowest levels in more than a year as crises in the banking sector unsettled financial markets and stoked fears for the broader economy.
Brent crude, the global energy benchmark, slipped 5 per cent on Wednesday to settle at $73.69 a barrel. That left it down more than 10 per cent this week and at its lowest level since December 2021. West Texas Intermediate, the US marker, fell below $70 a barrel to settle at $67.61.
“You’re getting a lot of hedge fund liquidation,” said Dennis Kissler, senior vice-president of trading at BOK Financial, an Oklahoma bank. “You’re seeing uneasiness in the financial sector bleeding over to the energy sector.”
The sell-off showed how oil markets had become swept up in worries over the health of banks after last week’s collapse of Silicon Valley Bank in the US. Switzerland-based Credit Suisse became embroiled in the turmoil on Wednesday, with its shares shedding 24 per cent. Bank stocks in Europe and the US came under heavy selling pressure.
Commodity traders fretted that contagion in 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 by 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 a recovery in Chinese fuel demand would happen 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 — an indicator of weakening consumption — added to the bearish sentiment. The International Energy Agency on Wednesday 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.
But the sell-off had turned into an overcorrection, he added. “There is nothing on the horizon that says we have a massive surge in supply or massive drop in demand coming. The fair-market price [of oil] was lower than prices last week. But the fair-market price is probably higher than it is now,” Morse said.
While the IEA noted a sharp rise in stocks, it also said global demand would “accelerate sharply” to a record high later this year.
“This is not an oil-market problem — oil is the receiving end” of wider market fears, said Amrita Sen, head of research at Energy Aspects. “Could it go [down] another $10? Of course — there is lots of momentum.”
The sharp drop in crude prices will raise the prospect of the US government buying oil to replenish its Strategic Petroleum Reserve after selling millions of barrels last year in an attempt to calm surging energy markets. The Biden administration had previously indicated it would buy back oil if prices dropped to $70 a barrel.
Asked for comment, the US Department of Energy referred to a December statement from the White House that said it would purchase oil “at times when the price of . . . WTI crude oil is at or below about $67 to $72 per barrel”.