Banking crisis triggers oil price fall; temporary phenomenon, say analysts

Crude Oil prices declined by 10 per cent in the last 7 days - from $80.6 per barrel (Brent oil) on March 13

The 10 per cent fall in crude oil prices in the last 7 days – from $80.6 per barrel (Brent oil) on March 13 to $72.4 now – is likely to be temporary, believe analysts, who expect them to bounce back once the banking sector crisis in the US and Europe is fully contained.

Crude's sell-off through last week, according to Vandana Hari, Founder & chief executive officer at Vanda Insights, a Singapore-based provider of oil markets macro-analysis, was driven by a panic exodus from risk assets triggered by the banking crisis.

“It was baking in the worst-case scenario, of the banking chaos leading to a financial crisis and/or a recession. The dive was likely amplified by technical selling and options trading. It left crude completely decoupled from current fundamentals. How long the risk-off pressure on crude lasts and how and when prices recover will depend on two things. First, the return of stability and investor confidence in the banking sector, especially in the US and Europe; and the Fed's rate move, dot plot, and Powell's comments on Wednesday," she said.

The recent trouble for the banking sector in the US started with the collapse of US-based Silicon Valley Bank (SVB), Silvergate Capital and Signature Bank. Moody’s Investors Service also cut its outlook for the US banking system to ‘negative’ from ‘stable’, citing the run on deposits at these three banks that led to the collapse of these banking majors in less than a week.

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In Europe, the situation was brought under control after UBS agreed to buyout troubled rival Credit Suisse for around $3.25 billion in a government-brokered deal. Credit Suisse, according to reports, is among the 30 financial institutions known as globally systemically important banks and could have triggered a panic-like situation had the authorities not stepped in to salvage the situation, analysts said.

Joe DeLaura, senior energy strategist at Rabobank International, agrees and said that the fallout from the Silicon Valley Bank/Signature Bank Call failures was the main contributing factor to this sell-off in oil prices, as traders expected a weakening economy and possibly a steeper recession.

That said, once the banking crisis is contained, analysts expect the crude oil prices to gradually start to move up from the current levels. Hari of Vanda Insights, for instance, expects nearly 18 per cent rise in oil prices by 2023-end.

"Forecasting crude oil prices in 6-8 months from now is very difficult. That said, assuming the banking crisis blows over and the economic outlook goes back to where we were before last week, I would expect Brent in the $75-85 range by 2023-end," she said.

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Moderation in inflation, infusion of fresh capital into the banking system and end of rate hiking cycle, according to G Chokkalingam, founder, Equinomics Research & Advisory, would lead to significant economic recovery from 2024. This, he believes, would see oil prices climb higher.

“Cartelisation efforts of OPEC+ and depletion of oil reserves would lead to significant rise in oil prices going ahead. I think it would be difficult for oil prices to crash significantly from here on. Brent crude oil might see bottom around $70 a barrel. This crash is partly due to panic reactions in the backdrop of global events. Oil could recover to around $75 - $80 range once the banking crisis in the US subsides,” he said.

Meanwhile, DeLaura of Rabobank International expects China's demand for oil to accelerate in the summer and autumn, further boosting refined product crack spreads.

“OPEC+ is vested in supporting crude oil prices to fund their domestic spending projects. The sweet spot for OPEC+ is to keep the market in backwardation to prevent attractive forward hedging for non-OPEC producers and also keep oil prices in the $75-95 per barrel range,” DeLaura said.