If there is a discipline in which that old metaphor of the “butterfly effect” is fulfilled, the one that tells us how a slight flutter here can unleash a hurricane on the other side of the globe, economics is a clear candidate. Examples are plenty. The last one, with its own name: Silicon Valley Bank (SVB). Its collapse, which in turn cannot be understood without the interest rate hikes with which the US Federal Reserve (Fed) has tried to combat inflation over the last year, has generated turbulence and fueled fear of a financial crisis.
Against this complex backdrop, the markets are now witnessing another trend, just as relevant: a significant drop in the price of crude oil.
What does the data show? A downward curve. Investing charts reveal a noticeable drop in Brent oil futures and of the WTI Crude (West Texas Intermediate), the main reference in the US market. And all this with the still recent memory of the intense escalation of prices that recorded crude oil in 2022. about a year agowithout going any further, the Brent of the North Sea flirted with values close to its historical maximum of 2008.
The photo provided by the economic platform on Friday reflects that the price of a Brent barrel for delivery in May ended the day in the London market at $72.53, 2.67% less than at the end of the previous session. Its price had fallen for the fifth consecutive session and ended the week with a decrease of more than 12% compared to the previous Friday, when the news about the collapse of Silicon Valley Bank was still recent.
a bit of context. As remember in Axiosoil prices have fallen to their lowest levels since the end of 2021. And they have done so in the midst of a very specific scenario, marked by the collapse of SVB, the Signature Bank episode or the crises suffered at Credit Suisse and First Republic. “Broader market concerns related to the banking sector have weighed on risky assets, while oil is also seeing some weak fundamentals at the moment.” valued earlier in the week the ING economists.
“The underlying fundamentals aren’t as dire as what’s trading here, but there are concerns that oil isn’t as safe a place as cash or gold,” comments to Reuters John Kilduff, partner at Again Capital LLC.
A clear diagnosis for the sector. in OPEC+ they have it clear. For the body that brings together the large exporters, the drop in oil prices to lows that have not been seen for more than a year is not explained by an imbalance between supply and demand, but by something less measurable: fears financial. In fact, he is confident that the market will eventually stabilize.
“It’s purely financially driven,” stresses to Reuters one of his delegates. From the collective they defend that in the last monthly report on the oil market, from just a few days ago, an improvement in demand from China is expected and also points to a balance between supply and demand.
Comparative Brent oil and WTI oil pic.twitter.com/AiPwwtIyUT
— Ismael De La Cruz (@delacruz_ismael) March 15, 2023
What can we expect? A similar question is they raised days ago ING analysts: “The key question for the market is: ‘Where is the floor?’ This will largely depend on OPEC+ and the US.” In their report they point out that, given the scale, it was not ruled out that the agency chooses to intervene to stabilize the market. “Although so far it has been very quiet,” they settle.
“As for the US, the government had previously said it would look to top up its strategic oil reserves as long as WTI trades around US$70/bbl in the region,” they affect. From Axios point another key: over the next few months, the fall in the price of oil should in turn have an impact, and in the same sense, on inflation. If so, the scenario could favor the Fed softening rate hikes. Questions remain, in any case, such as whether OPEC will touch production or how prices will affect production.
Cover image: Zbynek Burival (Unsplash)
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