Oil prices fall despite central bank action: Time to buy the dip?
Oil prices fell again on Monday as traders weighed up global banking sector risks and another US interest rate hike, which could subsequently prompt a recession and reduce demand.
Brent crude (BZ=F) was down 0.55% to $72.57 (£59.26) a barrel, while US West Texas Intermediate crude (CL=F) fell 0.21% to $66.60.
“Last week, oil prices fell 10%, marking the worst weekly decline since April 2020,” independent macro analyst Piero Cingari said.
“Concerns about demand and mounting recessionary risk in the US and Europe are pressuring crude oil prices, which are now trading at their lowest levels since the end of 2021.”
What’s impacting oil prices?
The fall in oil prices has been partly attributed to the turmoil in the banking sector after Silicon Valley Bank and Signature Bank (SBNY) in the US collapsed, and Switzerland’s Credit Suisse (CS) was taken over by rival UBS (UBS).
“The turmoil in the banking industry is obviously the most important factor impacting oil prices. Confidence in cyclical commodities is very weak, although there are hints of oil demand recovery in Asia, such as the Chinese Unipec's recent purchase of 2 million barrels of Johan Sverdrup oil from the North Sea,” Cingari added.
ING analysts also highlighted that fundamentals have not been strong enough to prop up the market. The group also warned that fears of an economic slowdown and anticipation of the Federal Reserve interest rates meeting will also keep markets volatile this week.
Central banks rally together
Following the Credit Suisse takeover announcement, the US Federal Reserve and several other major central banks announced a coordinated effort to boost the flow of US dollars through the global financial system to help keep credit moving and settle wider market panic.
“The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements,” the central banks said in a joint statement.
Oil price outlook
“Unless we enter a severe financial crisis, I believe we are reaching a price range — between $61 and $62.5 per barrel — where oil might potentially see a strong price support as China reopens. This region held up quite nicely in May, August 2021 and December 2022,” Cingari said.
Osama Rizvi, energy market analyst at Primary Vision, said: “The recession or rolling recession as it is being called now, continues to put downward pressure on prospects of oil demand in paper markets.
“Physically there hasn’t been a substantial disruption to oil supply. Russian oil exports have only reoriented themselves and total oil supply more or less remains the same. No disruption as I always say, only redirection.”
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Rizvi also noted that the open interests in oil contracts, especially Brent, have jumped recently as per data from Intercontinental Exchange (ICE) but said this “shouldn’t be taken as anything else but as a speculative interest in markets”.
“However, I still believe given the tail risks of a full blown economic recession in the US, stable supply from Russia and not so resilient demand by China so far, oil prices have more chances of going down than up,” he added.
Oil seeing some support
However, Craig Erlam, a senior market analyst at OANDA, said oil is seeing some support.
“Traders have been forced to reassess the outlook for the global economy in light of recent issues in the banking sector and it would appear they're no longer so optimistic. That may of course change as things settle down, assuming they do in the short-term, but for now, they're taking a far more cautious stance,” he said.
“Brent saw support around $70 and in recent days has bounced back strongly from early sell-offs, which could suggest a rebound is on the cards.”
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