Oil Futures Drop as Bank Collapses Triggers Recession Fears
The recent collapse of Silicon Valley Bank (SVB) over the weekend has stirred fears of a potential recession, ultimately leading to a drop in oil futures by the end of Monday. Federal regulators moved to make depositors in SVB and Signature Bank whole, while backstopping deposits at other regional banks in an effort to prevent a run on other institutions.
Price Action
West Texas Intermediate crude for April delivery fell $1.88, or 2.5%, to close at $74.80 a barrel on the New York Mercantile Exchange. May Brent crude, the global benchmark, declined $2.01, or 2.4%, to settle at $80.77 a barrel on ICE Futures Europe. Meanwhile, April gasoline fell 2.1% to finish at $2.5914 a gallon, while April heating oil declined 0.4% to $2.7615 a gallon. However, April natural gas jumped 7.2% to $2.606 per million British thermal units.
Market Drivers
The collapse of SVB, the second-largest bank collapse in US history, has caused investors to pile into safe-haven assets like US Treasuries and gold, while shunning other commodities. The Federal Reserve has announced a new facility designed to ensure customers at all banks could access their deposits as regulators guaranteed all deposits at SVB and Signature Bank.
Energy traders were not expecting the collapse of the 16th-largest lender in America to trigger a major risk-aversion wave that would send Brent crude below the $80 a barrel level. Edward Moya, senior market analyst at Oanda, commented that the chaos in the bond market is also weighing on commodities. Oil’s roller-coaster ride is unlikely to end soon as Tuesday’s inflation report could upend the rally hitting Treasuries.
The upside, however, may be limited by strong buying from China, said analysts at ING. This move ties in with a demand recovery expected not only from China but broader Asia, following a relaxation in China’s zero-COVID policy late last year.
Conclusion
The collapse of SVB has had a significant impact on the oil futures market, and the fear of a potential recession is starting to show. Investors continue to pile into safe-haven assets, which is likely to drive buying activity for countries like China.
As the global economy continues to navigate the current environment, it is imperative for financial regulators to take necessary measures to stabilize the banking system and prevent future bank collapses.
