Oil market sentiment has never been more fragile, the price action traded this past week takes me back to the cusp of the Covid-19 collapse.
Geopolitical tensions have the power to move the energy markets violently, but the real impact on supply and demand remains elusive, the markets hold much more immediate sway.
What started as the Silicon Valley Bank collapse quickly spread to Signature Bank, eventually bringing down shares of many regional banks.
But it didn’t stop there … it was exacerbated by a sell-off of Credit Suisse shares.
Oil prices tanked to a 52-week low in response. The fear of failed bank contagion spreading to the wider financial market could send the economy into a further tumble.
While some have suggested that the dust will settle regarding the banking crisis and that oil will bounce back quickly … The greater concern in sight is that future interest rate hikes still make traders nervous.
At the same time that the Swiss National Bank offered Credit Suisse a $54-billion lifeline, the European Central Bank (ECB) raised interest rates by 50 basis points.
That partially explains crude’s brief recovery rally on Thursday.
Before the bank scare, analysts had been expecting the ECB to hike rates by 25 basis points in May and again consecutively in June.
Now, there’s even more uncertainty over rate hikes, which means more uncertainty for oil markets which will now likely be hanging on every whisper from the Fed.
When SVB collapsed, many analysts speculated that the Fed might halt on its aggressive rate hike policy in the face of pressure, especially on smaller regional banks.
If other central banking systems around the world also stick to pre-existing rate hike trajectories, we can expect oil prices to remain highly volatile in the nearterm.
Now, even though America’s biggest banks have come together to rescue First Republic with a $30 billion lifeline after the bank’s shares plunged 70% following the SVB collapse, the market is still on high alert.
It might not be enough.
Why? Because in recent days, many banks have been reaching out to the Fed for record levels of emergency liquidity, suggesting that the crisis is not over yet.
The “G” is doing everything they can to keep folks calm as they’re trying to mitigate the damages of this catastrophe without causing panic.
The fact of the matter is, they don’t have enough money in circulation for mass hysteria followed by excessive withdrawals from the banks.
We’d have a total financial system collapse if that were to occur.
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