Oil prices fall as US bank collapse causes turmoil in markets

Crude futures declined last week after hawkish comments from the Fed chief

An oil rig in UK waters. A weaker greenback makes dollar-denominated oil cheaper for holders of other currencies. PA

Oil prices fell sharply in afternoon trading on Monday as the collapse of a major US bank led to a sell-off in markets.

After rising by 0.5 per cent earlier, Brent, the benchmark for two thirds of the world’s oil, was trading 1.45 per cent lower at $81.56 a barrel at 3.21pm UAE time.

West Texas Intermediate, the gauge that tracks US crude, was down 1.53 per cent at $75.51 a barrel.

Brent settled at $82.78 on Friday, 3.6 per cent lower than the previous week. WTI closed down 3.8 per cent at $76.68 a barrel.

On Friday, US regulators closed Silicon Valley Bank, the 16th largest bank in the country, after depositors hurried to withdraw money amid concerns about the bank’s health.

It was the second biggest retail bank failure in US history, after the 2008 collapse of Washington Mutual due to the global financial crisis.

As of December 31, SVB had about $209 billion in total assets and $175.4 billion in total deposits.

"With the markets screaming distress as traders ponder the contagion effect of the SVB fallout, crude oil prices have been equally susceptible to weakness," Ehsan Khoman, head of emerging markets research for Europe, the Middle East and Africa at Japanese bank MUFG, told The National.

"Yet the risk of broader contagion remains low and the question becomes how far markets believe policymakers will step back the hawkish rhetoric to prevent other unexpected failures."

Last week, Fed Chairman Jerome Powell indicated that interest rates may need to increase further and at a faster pace than previously anticipated following stronger-than-expected US economic data for January.

After its February meeting, the Fed raised interest rates by 25 bps — the eighth increase since March 2022. The Fed will meet next on March 21.

Oil prices rose earlier on Monday on expectations that the SVB's collapse would prompt the Fed to abandon aggressive interest rate increases.

“The bank crisis will be sitting in the headlines, as solutions and possible contagion beyond the banking sector and beyond the US borders will be on the menu of the week,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“So, it is well possible that the Fed may simply forget about a 50-basis-point hike this month or may not hike at all.”

Mixed US employment data released at the end of last week also supported oil prices as the dollar fell.

US non-farm payrolls rose by 311,000 jobs last month, data released by the Labour Department on Friday showed.

The previously reported number of jobs added in January, which was 517,000, was revised downwards to 504,000.

Unemployment rose slightly to 3.6 per cent, up from the 53-year-low of 3.4 per cent.

Average hourly earnings rose 0.2 per cent after January's gains of 0.3 per cent. Over the past 12 months, wages have increased by 4.6 per cent, below estimates of 4.8 per cent.

The US Dollar Index — a measure of its value against a weighted basket of major currencies — was down 0.34 per cent at 104.22.

A weaker greenback makes dollar-denominated oil cheaper for holders of other currencies.