Oil sinks 5% as Moodys banking downgrade drops another shoe on crisis

By Barani Krishnan

Investing.com - The assurance of authorities that all’s well and dandy on the U.S. banking front hasn’t won the confidence of Moody's, which downgraded the sector on Tuesday, sending crude prices down almost 5% on the notion that an economy in trouble won’t help oil.

New York-traded West Texas Intermediate, or WTI, crude settled down $3.47, or 4.7%, at $71.33 per barrel, after a two-month low at $70.94. With Monday’s 2.4% on WTI, the U.S. crude benchmark has lost  more than 7% since this week began.  

London-traded Brent crude settled down $3.32, or 4.1%, at $77.45. Like WTI, Brent hit a two-month low earlier in the session,  touching $77.05. The global crude benchmark has lost almost 7% since the start of the week, after accounting for the 2.4% slide in the previous session.

Crude prices have tumbled since Monday in the wake of last week’s collapse of Silicon Valley Bank (NASDAQ:SIVB), which forced the Federal Deposit Insurance Corp to seize control of the California-based lender and at least one other bank to prevent contagion. The Biden administration has assured depositors in U.S. banks that their money is safe and that there will be no rerun of the 2008 financial crisis. The Federal Reserve said it was conducting a thorough review to help plug holes in the banking system.

Despite this, Moody’s issued a downgrade of the banking sector, citing a “rapidly deteriorating operating environment” that it said carried risks associated with the Fed’s plan to continue raising interest rates. The central bank has added 450 basis points to rates over the past year to control headline inflation, which the Consumer Price Index showed stood at 6% during the year to February, three times above the Fed’s annual 2% target.

What’s surprising, some analysts say, is oil’s continued tumble on the so-called SVB crisis despite Wall Street’s three major stock indices — the Dow, S&P 500 and Nasdaq — all rebounding strongly from Monday’s slide.

“Oil prices are continuing to whipsaw while remaining within the broad ranges they've traded within since early December,” noted Craig Erlam, analyst at online trading platform OANDA. “Yesterday we saw Brent and WTI testing the lower end of these in response to the turmoil that erupted in the financial system that triggered widespread risk aversion.”

“Today we're seeing them trade lower again, albeit still higher than yesterday's lows. If we see markets settle down, that could prevent a break of the lows but oil traders, like those elsewhere, will remain nervous about the prospect of further turbulence. Suddenly, a break below the lows looks a much greater risk which may keep pressure on in the short term.”

On the oil supply front, OPEC, or the Organization of Petroleum Exporting Countries, said in its monthly report released earlier on Tuesday that it was pumping about 28.92 million barrels of crude a day, or about 300,000 a day more than it expects will be needed in the second quarter. 

The surplus could be even larger if production from Russia continues to prove resilient to international sanctions, because OPEC’s outlook assumes a sharp drop in the country’s output next quarter. World oil consumption typically eases around this time, a softer patch between the end of winter and start of the summer driving season.

Traders will be on the lookout as well for ideas on how U.S. oil inventories might have closed last week as they await the Energy Information Administration’s weekly report on supply-demand.

The first indications will come from the API, or American Petroleum Institute, after Tuesday’s market settlement.

The API will release at approximately 16:30 ET (21:30 GMT) a snapshot of closing balances on U.S. crude, gasoline and distillates for the week ended March 10. The numbers serve as a precursor to official inventory data on the same due from the EIA on Wednesday.

For last week, analysts tracked by Investing.com expect the EIA to report a crude stockpile build of 1.188 million barrels, versus the 1.694M barrel reduction reported during the week to March 3.

On the gasoline inventory front, the consensus is for a draw of 1.820M barrels that would add to the 1.134M barrel decline in the previous week. Automotive fuel gasoline is the No. 1 U.S. fuel product.

With distillate stockpiles, the expectation is for a drop of 1.172M barrels versus the prior week’s gain of 0.138M. Distillates, which are refined into heating oil, diesel for trucks, buses, trains and ships and fuel for jets, have been the strongest component of the U.S. petroleum complex in terms of demand.