Oil prices fell to their lowest level in more than a year as a crisis in the banking sector unsettled financial markets and raised concerns about the wider economy.
Brent crude, the global energy benchmark, fell 5 percent on Wednesday to settle at $73.69 a barrel. That sent it down more than 10 percent this week to its lowest level since December 2021. West Texas Intermediate, the U.S. benchmark, fell below $70 a barrel to settle at $67.61.
“You’re getting a lot of hedge fund liquidation,” said Dennis Kissler, senior vice president of trading at BOK Financial, an Oklahoma bank. “You see the turmoil in the financial sector spilling over into the energy sector.”
The sale showed how oil markets have been gripped by concerns about the health of banks after last week’s crash Silicon Valley Bank In the United States. Credit Suisse based in Switzerland got into a mess its shares fell 24 percent on Wednesday. Bank shares in Europe and the US came under strong selling pressure.
Commodity traders worried that contagion in financial markets would rub off on the physical economy, reducing consumer spending and denting demand for oil.
“It’s related to concerns about the outlook for economic growth as a result of the stress you’re seeing in the financial sector,” said Greg Sharenow, a portfolio manager at Pimco. “That was the catalyst and the spark.
Oil’s decline was accentuated by forced selling by speculators who had bet on higher prices in recent weeks, analysts said. Traders became more optimistic, believing that a recovery in Chinese fuel demand would come just as Russian oil exports began to weaken in response to the tightening of sanctions over the invasion of Ukraine.
“The bullish bias was increasing, but no one planned for a banking crisis.” Last week nobody was talking about European banks,” said Rory Johnston, who runs Commodity Context, a market research service. “Now it’s all about Credit Suisse.
News of rising oil inventories in developed countries – an indicator of waning consumption – added to bearish sentiment. Oil inventories in rich nations rose to an 18-month high in January, the International Energy Agency said on Wednesday, pointing to “still lackluster” global demand.
Ed Morse, global head of commodities research at Citigroup, said oil markets had been “looser than people thought” in recent weeks, leaving bullish traders exposed to a reversal.
But the selloff turned into an overcorrection, he added. “There is nothing on the horizon that says we have a massive increase in supply or a massive drop in demand coming. Fair market price [of oil] were lower than last week’s prices. But the fair market price is probably higher than it is now,” Morse said.
While the IEA noted a sharp rise in inventories, it also said global demand would “accelerate sharply” to record levels later this year.
“This is not an oil market problem — oil is a beneficiary” of broader market concerns, said Amrita Sen, head of research at Energy Aspects. “It could work [down] another 10 dollars? Of course – there are a lot of impulses.’
A sharp drop in oil prices will raise the prospect that the U.S. government will buy crude to replenish its strategic oil stockpile after selling millions of barrels last year in an effort to calm rising energy markets. The Biden administration has previously indicated that it does buy back of oil if prices fell to $70 a barrel.
The US Department of Energy, which manages the reserve, did not respond to a request for comment.