Fears of contagion from US banking crisis hit oil market
Oil prices remained under pressure after the biggest banking sector crisis in the US since 2008 resulted in investor panic in almost all global asset classes and triggered a flight to safety to asset classes like gold and silver. Investors remained concerned about the possibility of a fresh financial crisis amid the prevailing uncertainty in the market despite assurances from the US government as well as support for the banking sector. Rates hike expectations for the rest of the year also underwent a drastic sentiment change as some economists now expect the Fed to lower its aggressive policy and implement merely one 25 bps hike this year followed by rate cuts during the second half of the year. Brent crude futures traded below the $80/b mark for the first time in more than two months and put contracts options rose to the highest level since mid-August on 13-March 2023 indicating lack of confidence in a near term rally.
Oil bets showed a complete reversal from a previous data that showed bulls outpacing bears by most in four years, according to ICE Futures Europe data. Crude oil prices were also affected by recent inflation data from China that could indicate a weaker-thanexpected recovery in oil demand this year, whereas a modest GDP growth forecast announced last week also casted doubts on extent of demand growth from China. Indicators on the oil demand front remained mixed with China showing higher demand for refined products while gasoline consumption in the US declined to seasonal averages after seeing the largest decline in three months last week.
A note from FGE also showed an expected increase in jet fuel demand in China starting from the end of this month led by higher summer travel demand. OPEC’s secretary general also pointed out the divided demand globally at a recent conference and added that while Asia is experiencing strong demand growth, the trends in Europe and the US are a concern. He reiterated that lack of new investment in the sector to expand capacity is threatening global energy security. On the supply side, the EIA in its latest Short Term Energy Outlook, said that global liquid fuel output is expected to outpace demand in 2023 and 2024.
On the other hand, Bloomberg data showed Russian seaborne crude oil flows rebounded mainly led by higher purchases by India, although the importer has said it would not breach the price cap sanctions imposed on Russia. Weekly data on US crude oil production showed flattish trend after a decline of 100 tb/d during the week ended 3-March-2023 to reach 12.2 mb/d. Oil production in the OPEC, according to Bloomberg data, showed an increase of 120 tb/d mainly led by higher production in swing producers Nigeria and Libya.
The monthly increase in the CPI was higher than expected at 0.5 percent vs. estimates of 0.4 percent, according to Bloomberg. The higher-than-expected inflation once again bought back expectations of a 25 bps hike next week vs. no hikes that were expected after the banking crisis erupted in the US. Average crude oil prices showed mixed trend during February2023 vs. January-2023, although the changes were largely minimal. OPEC crude basket averaged at $81.88/b with a growth of 0.3 percent. The increase in Kuwait crude grade was similar at 0.3 percent and averaged at $83.19/b while average Brent declined by 0.4 percent during the month to $82.5/b.
Consensus expectation for Brent crude oil showed minimal changes as compared to last month, with marginal cuts for estimate in Q1 - 2023 and an upgrade for Q4-2023. EIA, however, expects a decline in prices after slashing its estimates for Brent spot prices from $83.63/b in the STEO last month to USD 82.95/b in its latest report. The price forecast for 2024 were kept unchanged at $77.57/b, according to EIA.