“Global Recession Fears and US Banking Sector Concerns Cause Oil Prices to Plummet: Expert Analysis”

2023-05-03 11:04:00

Oil prices fell once more on Wednesday on fears of a global recession and questions regarding the strength of the US banking sector, with WTI briefly slipping below $70 for the first time since the OPEC+ cuts.

Around 1:00 p.m. (Paris time), the barrel of West Texas Intermediate (WTI), for delivery in June, dropped 3.4%, to 69.24 dollars, its lowest level since mid-December 2021, shortly following having slipped below the 70 dollar mark, a first since the end of March. Its European equivalent, a barrel of Brent from the North Sea for delivery in July, lost 3.14% to 72.95 dollars.

A drop of 14% in one month

Over a month, the two crude oil benchmarks lost more than 14% of their value.

“Concerns regarding the US banking sector have resurfaced following the second-largest US bank failure since the 2008 crisis”explains Stephen Brennock, an analyst at PVM Energy.

The authorities and players in the banking sector hoped that the takeover of First Republic by JPMorgan on Monday would sound, at least temporarily, the end of the turmoil in the world of finance, but regional banks remained under pressure on Wall Street.

“Regional bank stocks have been hurt on contagion fears”underlines the analyst, recalling that “at the same time, a further rise in interest rates is on the horizon”.

Another rate hike expected by the Fed

Indeed, the market expects the US Federal Reserve (Fed) to increase by a quarter of a percentage point on Wednesday following its monetary policy meeting, to counter inflation. However, a stricter monetary policy might weigh on the world’s leading economy by increasing the cost of credit for households and businesses. What accentuate the risks of recession, and therefore of a drop in demand for oil.

“If there is one global asset that can be said to be particularly sensitive to fears of recession, it is oil”, says Jameel Ahmad, analyst at CompareBroker.io. Negative signals on China’s economic growth add to general apprehensions regarding the global economy, say analysts at Energi Danmark. The Purchasing Managers’ Activity Index (PMI) in China, a reflection of the health of the industrial world, contracted in April, according to official data released on Sunday.

The two world crude benchmarks have thus largely lost their gains linked to the voluntary production cuts of certain members of the Organization of the Petroleum Exporting Countries and their allies (OPEC+). These cuts, announced at the beginning of April, and effective from May until the end of 2023, had been interpreted by many analysts as a desire by the alliance to defend a barrel of Brent above 80 dollars.