Oil steadies after plunging to more than one-year low amid banking crisis fears

US crude stocks rose by 1.6 million barrels last week

Pump jacks at an oilfield in Texas. Oil prices have been very sensitive to the recent shift in risk sentiment, UBS said. Reuters
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Oil prices were steady on Thursday after falling by about 5 per cent to a more than one-year low the previous day as uncertainty over Swiss bank Credit Suisse triggered a broad sell-off in financial markets.

Brent, the benchmark for two thirds of the world’s oil, was trading 0.12 per cent lower at $73.60 a barrel at 7.48pm UAE time, while West Texas Intermediate, the gauge that tracks US crude, was down 0.25 per cent at $67.44 a barrel.

On Wednesday, Brent settled 4.85 per cent lower at $73.69 a barrel, its lowest level since December 2021. WTI was down 5.22 per cent at $67.61 a barrel.

“Some might wonder why a banking crisis is hitting oil so hard, as it is unlikely to impact crude demand and production,” said UBS strategist Giovanni Staunovo.

“But during periods of elevated volatility, investors tend to pull out of risky assets like oil and invest in safer corners of the market. Oil prices have been very sensitive to the recent shift in risk sentiment, particularly due to the lack of supportive price fundamentals, with US oil inventories building this year.”

Credit Suisse received a liquidity lifeline from regulators after the Swiss lender's shares fell by as much as 30 per cent on Wednesday.

Swiss financial regulator Finma and the country's central bank said that Credit Suisse met the “capital and liquidity requirement imposed on systematically important banks”.

The bank will borrow up to 50 billion francs ($54 billion) from the Swiss National Bank.

Credit Suisse's shares went into free fall earlier on Wednesday after its largest investor said it could not provide more financial assistance to the bank.

The drop in its shares triggered a broader sell-off in European banking stocks, with the main indexes in the US also closing lower on Wednesday.

Global markets were already facing significant turmoil after the collapse of California-based Silicon Valley Bank.

"What is intensifying the drop in prices is the options market, through so-called delta hedging. Financial institutions sold downside protection instruments (put options) to oil market players, for instance producers," Mr Staunovo said.

"With the oil price falling below the level where the protection kicks in (strike level), those financial institutions now need to avoid having a price risk on their balance sheets. So, they are selling crude futures to offset the risks, amplifying the rout. In the near term, uncertainty in financial markets will need to fade before we can see a stabilization followed by a recovery in oil prices."

Edward Moya, a senior market analyst at Oanda, said Credit Suisse mattered and that contagion risks would not be easing soon, at a time when “the US consumer is weakening and China’s outlook is not looking so robust after unemployment rose and on worries over the real estate market”.

On Friday, US regulators closed SVB, 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.

“Oil prices have been very sensitive to the recent shift in risk sentiment, particularly due to the lack of supportive price fundamentals, with US oil inventories building this year,” UBS said in a research note.

Brent, which shed about 10 per cent this week, has lost about a fifth of its value over the past 12 months amid concerns of an economic slowdown and China’s Covid-19 curbs, which were lifted in January this year.

“We think investors have limited appetite for adding crude exposure, until oil inventory draws can provide a more positive environment,” the Swiss lender said.

US crude stocks — an indicator of fuel demand — increased by 1.6 million barrels last week, according to the country's Energy Information Administration.

Meanwhile, total petroleum stocks fell by 2.1 million barrels while distillate inventories decreased by 2.5 million barrels last week, the EIA data showed.

The International Energy Agency expects global oil demand to rise “sharply” this year amid a rebound in air traffic and pent-up Chinese demand.

Oil demand growth will “accelerate” to 2.6 million barrels per day in the final three months of this year, from 710,000 bpd in the current quarter, the Paris-based agency said on Wednesday, as it released its February oil market report.

Global oil demand in 2023 will rise by 2 million bpd, compared with 2.3 million bpd last year. This was unchanged from last month’s forecast.

Updated: March 16, 2023, 4:01 PM