Crude oil lower; banking strains could hit economic activity

By Peter Nurse   

Investing.com -- Oil prices retreated Monday, falling to their lowest levels in 15 months on worries that risks to the global banking sector as well as further interest rate hikes will hit economic activity and, in turn, weigh on demand for crude.

By 09:25 ET (13:25 GMT), U.S. crude futures traded 0.6% lower at $66.51 a barrel, while the Brent contract fell 0.5% to $72.58 a barrel. Both benchmarks dropped earlier in the session to levels last seen in December 2021, after shedding more than 10% last week.

Swiss banking giant UBS (SIX:UBSG) agreed over the weekend to buy embattled rival Credit Suisse (SIX:CSGN) for just over $3 billion, in a hasty deal brokered by Swiss authorities in an attempt to restore confidence to the banking sector.

Credit Suisse is by far the largest bank to fail in the last decade, but it’s not the only one this month as the smaller regional U.S. banks remain under pressure after the collapse of Silicon Valley Bank just a few days ago.

These banks are likely to rein in lending to preserve cash during these troubled times, which will limit economic activity as the year progresses.

At the same time, the Federal Reserve is expected to again increase interest rates when it meets on Wednesday, further tightening monetary policy as the U.S. central bank seeks to tame inflation still running at elevated levels.

“Volatility is likely to linger this week, with broader financial market concerns likely to remain at the forefront. In addition, we have the FOMC meeting this week, which adds further uncertainty to markets,” said analysts at ING, in a note.

With concerns growing about the extent of the growth in demand this year, focus is turning towards supply levels in order to balance the market.

In the seven days to March 17, data showed that Russia’s shipments fell by 90,000 barrels a day to 3.23 million barrels a day. A drop, but nowhere near the 500,000-barrels-a-day output cut that Russia said it would impose in March.

Further out, a ministerial committee of OPEC and producer allies including Russia, together known as OPEC+, is set to meet in early April, ahead of June’s official meeting of oil ministers from the cartel.

Iraq's Prime Minister Mohammed Shia' Al Sudani and OPEC Secretary General Haitham al-Ghais met over the weekend and stressed the need for coordination among oil-exporting nations to ensure prices do not fluctuate in too extreme a manner.

The latest positioning data showed a significant liquidation from speculative crude longs over the last reporting week, with net long in ICE Brent falling by 64,907 lots to 233,384 lots. 

“Given that the sell-off in the oil market has continued since last Tuesday, current speculative positioning is likely even smaller, ING added.