Oil growth projections remain stable despite market turmoil

A market slump triggered by fears of a global banking crisis pushed crude oil prices to near-term lows, but analysts said the state of the economy has not changed much, so expect a return to previous weeks’ levels.

The collapse of Silicon Valley Bank in California and Signature Bank in New York left broader markets in shambles last week. SVB in particular was taken on the back foot due to aggressive interest rate increases.

Outside of banking stocks, crude oil prices were among the biggest losers, although none were enough to influence decisions at the European Central Bank.

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

That leaves the market, including oil prices, to turn to the U.S. 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 bounce back this week if policymakers can manage inflation amid uncertainty in the financial sector and the wider economy.

This is not Lehman Brothers, which went bust during the subprime mortgage crisis that started the Great Recession.

“It is clear that sentiment is running ahead of reality, as when oil prices rose to $130 a barrel after the start of the war in Ukraine, only for it to slide back and find a new equilibrium that was more based on supply and demand. – which, despite the tremors of the contagion, really hasn’t changed too much,” Hickin said.

Even with those jitters, economists at the Organization of the Petroleum Exporting Countries left their global growth forecast unchanged at 2.6 percent for 2023, though that represents a drop from 3.2 percent expansion last year.

That growth forecast was shared by the OECD, which, like OPEC on Friday, said the recovery will be fragile. What this means for the Fed is unclear, although Phil Flynn of Price Futures Group in Chicago said banking problems, real or imagined, will continue for now.

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

West Texas Intermediate, the US oil price benchmark, hovered in the upper $60 range last week, a low not seen since late 2021. The benchmark started the year at $80 per barrel.

A research note by Giovanni Staunovo and Wayne Gordon at Swiss investment bank UBS, meanwhile, said the clouds need to clear before there is any meaningful recovery in oil prices, although they expect a rebound.

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

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

What happens this week will focus on the Fed meeting on Thursday. In addition to the focus on the financial sector, both retail and wholesale prices are falling, suggesting that the current policy is working. Nevertheless, consumer prices are about three times as high as the Fed’s target rate of 2 percent.

Market watchers had assumed before last week that the Fed would follow its peers with a 50 basis point rate hike, although that has been knocked back to expectations of a smaller 25 basis point hike. While analysts such as Hickin in London note that nothing has changed at a fundamental level for oil prices, sentiment may be what drives the market.

“Real concerns about systemic risk are valid and will persist even if the Fed somehow decides to pause,” said Abhi Rajendran, director of research and consulting at Energy Intelligence. “This is not a barrel counting market – it is primarily macro driven and likely to continue to be”

Apart from the Fed decision, there will be gauges of confidence from the EU this week. Data on orders for durable goods in the US economy is out on Friday.

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