Oil growth projections remain stable despite market jitters

A market rout triggered by fears of a global banking crisis pushed crude oil prices to near-term lows, but analysts said the state of the economy hasn’t changed much, so expect a return to the previous week’s levels.

The collapse of California’s Silicon Valley Bank and New York’s Signature Bank left the broader markets in chaos last week. SVB, in particular, has been caught in the bind by aggressive rate hikes.

Outside of bank stocks, crude oil prices were among the biggest casualties, although neither was enough to sway decisions by the European Central Bank.

“Inflation is expected to stay too high for too long,” the bank said after raising lending rates by 50 basis points, or 0.5%. Even with emerging support for struggling Credit Suisse, ECB officials said “the banking sector is resilient.”

That leaves the market, including oil prices, to turn to the US Federal Reserve, which meets on Thursday to consider its next steps in the fight against inflation.

Paul Hickin, editor-in-chief of the London-based Petroleum Economist, said markets could recover this week if policymakers manage inflation amid uncertainty in the financial sector and the broader economy.

This is not Lehman Brothers, which folded during the subprime mortgage crisis that ushered in the Great Recession.

“It is clear that sentiment is getting ahead of reality, similar to when oil prices soared to $130 a barrel after the start of the war in Ukraine, only to turn back and find a new balance based more on oil fundamentals. supply and demand — which despite the jitters of contagion haven’t changed much,” Hickin said.

Even with these jitters, economists at the Organization of the Petroleum Exporting Countries left their global growth forecast unchanged at 2.6% for 2023, although that represents a decline from last year’s 3.2% expansion. .

That growth forecast was shared by the OECD, which, like OPEC, said on Friday that the recovery will be fragile. What this means for the Fed is unclear, though Phil Flynn of the Price Futures Group in Chicago said the banking worries, real or imagined, will remain for the time being.

“It’s a tale of two markets,” he said. One, where supply and demand fundamentals are solid, but another where “the banking crisis is reducing confidence causing oil and gas liquidations.”

West Texas Intermediate, the US oil price benchmark, traded in the upper $60 range last week, a low it hasn’t seen since late 2021. The benchmark started the year at $80 a barrel .

A research note by Giovanni Staunovo and Wayne Gordon of Swiss investment bank UBS, meanwhile, says the clouds will need to clear before there is a significant recovery in oil prices, even if they expect a recovery.

“While the oil market is likely to remain volatile in the near term, we still expect increased imports and demand for Chinese crude, and lower Russian production, to lift prices in the coming quarters,” they wrote.

The US Department of Energy expects WTI to average $77.10 a barrel this year.

What happens this week will center around Thursday’s Fed meeting. Aside from the focus on the financial sector, both retail and wholesale prices are down, suggesting the current policy is working. Consumer prices are still about three times higher than the Fed’s 2% target rate.

Market watchers earlier last week had speculated that the Fed would follow its peers with a 50 basis point rate hike, although this was scaled back to expectations of a smaller 25 basis point hike. While analysts like Hickin in London note that nothing fundamentally changed for the price of oil, sentiment may be what is driving the market.

“The real concern about systemic risk is valid and will last, even if the Fed somehow decides to stop,” said Abhi Rajendran, director of research and advisory at Energy Intelligence. “This is not a barrel counting market – it is mostly macro driven and will likely continue”

Aside from the Fed’s decision, there are signs of confidence coming from the European Union this week. Data on durable goods orders in the US economy is available on Friday.

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