Oil prices hit their lowest level in a year as banking sector crises destabilized financial markets and raised fears for the broader economy.
Global energy benchmark Brent crude settled down 5 percent at $73.69 a barrel on Wednesday. That left it down more than 10 percent this week and the lowest level since December 2021. US marker West Texas Intermediate fell below $70 a barrel to settle at $67.61.
“You’re getting a lot of hedge fund liquidations,” said Dennis Kissler, senior vice-president of trading at BOK Financial, an Oklahoma bank. “You’re seeing financial sector malaise that was bleeding over to the energy sector.”
The sell-off showed how oil markets were gripped by worries about the health of banks after the collapse of Silicon Valley Bank in the US last week. Switzerland-based Credit Suisse was mired in turmoil on Wednesday, with its shares plunging 24 percent. Bank stocks in Europe and the US came under heavy selling pressure.
Commodity traders expressed concern that the contagion in financial markets would feed into the physical economy, reducing consumer spending and reducing demand for oil.
“This is related to the concerns about the economic growth outlook in the wake of the stress you see on the financial sector,” said Greg Shernow, portfolio manager at Pimco. “It’s the catalyst and the spark.”
Analysts said oil fell after being forced to sell by speculators betting on higher prices in recent weeks. Traders became more bullish on the belief that Chinese fuel demand would recover just as Russian oil exports began to fall in response to tightening sanctions over its invasion of Ukraine.
“The bullish bias was 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 Credit Suisse. is about.”
Reports of rising oil inventories in developed countries – an indicator of weakening consumption – added to bearish sentiment. Oil stocks in rich nations hit an 18-month high in January, the International Energy Agency said on Wednesday, pointing to “still subdued” global demand.
Ed Morse, global head of commodity research at Citigroup, said oil markets had been “looser than people thought” in recent weeks, causing bullish traders to face a reversal.
But the sell-off turned into an overcorrection, he added. “There is nothing on the horizon that says we have a massive surge in supply or a massive drop in demand. Fair market value [of oil] Prices were lower than 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 record highs later this year.
“This is not an oil-market problem — oil is the receiving end of broader market fears,” said Amrita Sen, head of research at Energy Aspects. “He can go [down] Another $10? Of course – there’s a lot of momentum.”
The US government is likely to increase its oil purchases to replenish its strategic petroleum reserves after selling millions of barrels last year in an attempt to calm energy markets from a sharp drop in crude prices. The Biden administration previously indicated it would buy back oil if prices fell to $70 per barrel.
Asked for comment, the US Department of Energy referred to a December statement from the White House that said it would buy oil “at a time when . . . WTI crude oil is at or below about $67 to $72 a barrel”.
