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19.03.2023 04:00 PM
Oil sells off at peak levels

On Friday, oil showed the largest weekly drop in more than a year amid a loss of confidence in the banking sector among investors.

Oil sells off at peak levels

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The oil market fluctuated in a relatively narrow range, as traders tried to balance the prospects of demand recovery in China and fears of a global recession.

Brent crude, the global benchmark, fell nearly by 12% in the week. European stocks and the U.S. index futures were also falling.

The bankruptcy of Silicon Valley Bank and then problems at Credit Suisse Group AG, exacerbated by oil options coverage, triggered a collapse in the crude oil market, sending prices to their lowest level in 15 months.

Although central banks later extended term credit lines to their beneficiaries, traders are hesitant, fearing that the turbulence is not over yet. At the same time, the oil sector received some relief as a result of a meeting between the heads of Saudi Arabia and Russia's OPEC+, where the group's efforts to "promote market balance and stability" were discussed.

The link between falling energy prices and the banking turmoil that led to technical selling and forced cuts in long positions is clear enough. Capital outflows signal a lack of opportunities for the development of the real economy. In other words, production will not increase because there is no way to get credit. All major mergers and acquisitions have also come to a halt. There's also the expected recession, the chances of which have risen sharply after the banks went bankrupt.

As a result, without capital, the real sector will face difficulties, which means that demand for oil and other carriers will not grow. The unrelenting epidemic of the latest COVID-19 strain in China also adds to the problems.

Obviously, investors were guided by these considerations when selling futures. Confirming the correctness of their reasoning, the US Department of the Economy said it would not be in a hurry to fill the tanks this year. This news also hit the oil market, causing it to move lower.

At the same time, the danger of a hot summer still hangs over us, which will increase energy consumption and harvest, but this is a matter of futures being traded now, so summer heat and planting has already been factored into calculations.

According to analysts, OPEC+ is likely to sit idly by and watch the market until Brent falls below $70 a barrel for an extended period. The words of the association's representatives have already confirmed experts' assumptions. The shrinking market is not yet of great concern to the UAE and its colleagues, but in May-June, the mood of producing countries may change dramatically, as oil prices will continue to fall amid the recession. The OPEC+ supervisory committee, which may recommend production changes, is due to meet on April 3.

Energy Aspects Ltd. also said the producer group will wait for financial markets to calm down before deciding whether to react.

It is likely that almost no one is expecting a rally by the end of this year. The question is whether a recession will come and how hard it will hit. The European Central Bank's interest rate hike on Thursday renewed fears about the economy. All eyes will be on the U.S. Federal Reserve's actions.

For now, Energy Aspects is sticking to its call for Brent to trade at $115. However, in April we should expect revision of target levels, since markets cannot recover from bankruptcies so far. Shares of shaky banks are still falling.

Egor Danilov,
Analytical expert of InstaForex
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