WTI More than 10% Down Amidst SVB Fallout

Although no major oil firm is exposed to SVB, the broader implications for the market from the tech bank's implosion have been dragging on crude prices. WTI is down more than 10% this week alone, sliding to a December '21 low.

Growth or Contagion?

Since Monday, crude prices have been trending lower. There was a brief interlude where oil rebounded a bit following the release of OPEC's monthly report, but the trend resumed soon after. The report affirmed the cartel's forecast for oil demand through the coming year, but there was a bright spot in the expectation that China would increase its energy consumption as its economy advanced. That coincided with reports showing that throughput in China's refineries had increased from higher consumer demand.

The optimism was able to trim off some of the intraday losses as risk appetite took a further dive at the start of Wednesday's session. First, there was a double downgrade of the European banking sector by Oddo Securities, and then Credit Suisse shares fell after its Saudi stakeholder said it would offer no more support for the beleaguered bank. European regulators spent the morning insisting that the banking situation in Europe was solid and that there was no risk of contagion because, as BaFin put it, "we don't have the same rules as the US". The market clearly believes there is something to worry about in European banks as stocks continue to fall.

The Tip of the Iceberg

Crude prices had been under pressure already as investors worry that the long-predicted recession is about to hit. SVB appears as a canary in the coal mine of underlying debt problems exacerbated by an unprecedented amount of global monetary policy tightening. Money markets have shifted to predicting that central banks will stop easing this month instead of previous expectations that the economy was solid enough to allow further tightening. 

Banking stocks continue to fluctuate, though following the support measure implemented by the Fed in the wake of the SVB collapse, there haven't been any banks being taken over by the FDIC. Focus is now on what the two largest central banks will do - Fed and ECB. Both were expected to hike by half a percentage point, but the consensus is that won't happen. Less monetary policy tightness might be seen as helping the economy in the short term and could finally put a floor on oil. But if that leads to higher inflation, concerns about the economic outlook could be revived, and oil would have difficulty retracing towards triple digits.

SPOT Light Crude Under Pressure Below $70/bbl

SPOT Light Crude prices remain under pressure in the short term, as the commodity slid outside its descending channel for what appears to be a trend acceleration. Without respite back into the regular bearish trend above the resistance of $70/bbl, prices could continue to descend towards $60 or lower. If $72.2/bbl is recaptured, WTI might put a low in, and 

Star its crawl towards triple digit again, with $78/bbl acting as a ceiling on its way up.

Source: Spreadex

Key Takeaways

Crude prices have been under significant pressure due to worries of an impending recession and a double downgrade of the European banking sector by Oddo Securities and Credit Suisse's fight in the wake of the SVB collapse. This has caused prices to slide to a December 2021 low and register more than 10% losses this week alone. WTI is currently below $70/bbl, possibly sliding further to $60/bbl or lower should it fail to recapture $72.2/bbl.