Brent Fends Off $70, But Will It Hold?

Brent crude is fending off a drop below $70 per barrel so far after prices hit a 15-month low last week. But some market observers warn that the same macroeconomic elements that informed the recent plunge remain, while crude’s own fundamentals offer limited support against the negative shift in sentiment.

“[Given] the fact oil prices had been trending lower for months, their breakdown last week from a multiweek consolidation pattern suggests there may be more downside potential in oil prices,” says Fawad Razaqzada of financial services firm StoneX.

Several market watchers and players share the skepticism that oil markets have seen a bottom, as a fresh banking crisis injects new risks into already skittish financial markets.

While this supercharged negative macroeconomic sentiment is hitting equities and commodities alike, some note that crude’s underlying fundamentals are softening in any case, making last week’s collapse of Silicon Valley Bank (SVB) and UBS’ buyout of troubled Swiss bank Credit Suisse this week a catalyst rather than the author of crude’s move lower.

Still, crude futures are showing a touch of resiliency, with some market players seeing a corrective move in order — even if temporarily — given the speed with which crude prices left their perch at or above $80/bbl earlier this month.

Brent and West Texas Intermediate (WTI) futures were able to settle higher for their second consecutive day on Tuesday, with Brent’s bounce taking it further away from the $70/bbl mark it touched briefly early Monday.

In London, Brent crude for May delivery settled up $1.53 on Tuesday at $75.32/bbl. In New York, April WTI on the Nymex expired $1.69 higher at $69.33/bbl, while the more heavily traded May contract gained $1.85 to end the session at $69.67/bbl.

“The oil market was oversold and obviously once some major bullish bets were fully unwound, prices were ready to stabilize,” said Edward Moya of trading platform Oanda.

Governments no doubt helped by stepping in to bolster beleaguered banks and facilitate other moves to fend off more systemic financial contagion.

Macro Risks

The depressive influence of macroeconomic sentiment on oil prices is not new. Fears of recession amid frenetic attempts to cool inflation have served as headwinds for oil for months now, and the banking crisis merely served to exacerbate them.

“The odds of a major macro crisis have obviously risen,” said analysts with investment bank Piper Sandler, although they added that they still see the likelihood as relatively small.

Indeed, SVB’s collapse and the swift implosion of other mid-tier firms may have put the US Federal Reserve in a bind when it comes to oil. If the Fed raises interest rates, the dollar rises relative to other currencies, and oil — denoted in US currency — becomes more expansive, potentially hampering demand.

However, if the Fed pauses its rate increases, some market sources see the market interpreting this as proof of vulnerability and signaling macroeconomic weakness that could in turn prompt selling.

Don’t Forget Fundamentals

All this said, oil is not exclusively being tossed around by broad-brush financial factors. From the perspective of supply and demand, the oil market is also softening.

Market interventions that were widely expected to roil markets — EU embargoes on Russian crude and refined products, the G7 price cap on Russian oil — have had a muffled impact, if any at all, as the market remains well-supplied.

In fact, Energy Intelligence data suggest that Russian exports have held up well in the wake of the Feb. 5 ban on products, with the country so far managing to find alternative markets for its crude and fuel — largely in the Asia-Pacific, and also to a degree in Latin America.

That means that when it comes to supply, “the risks … are skewed to higher Russian output for longer,” analysts with investment bank Goldman Sachs noted in a recent report — at least as far as exports are concerned. Indeed, the bank has slashed its oil price forecast.

Supplies are rising outside of Opec and Russia as well, led by Guyana, Brazil and the US, where data revisions suggest the US Energy Information Administration (EIA) has been underestimating supply while overstating demand. Nigerian volumes are on the rise as well.

On the demand side, malaise in the US and Europe is helping to offset rising consumption in China as the country abandons its zero-Covid-19 policies. Some experts and market players see the relatively limp demand west of the Suez as potentially structural for certain fuels — Marathon Petroleum, for example, has predicted a ceiling for gasoline demand in the US some 3% lower than pre-pandemic levels.

Recent developments in inventories speak to the trend. Energy Intelligence data show that global commercial inventories, OECD and non-OECD combined, saw a 69 million bbl rise last month, including rising crude stocks in China, where markets are expecting a big demand recovery. Product inventories are staying much higher than expected as well.

Energy Intelligence predicts substantial inventory builds of 1.3 million b/d the first half of this year, flipping to draws of some 600,000 b/d in the second half. The EIA itself also sees stocks growing on average this year and in 2024, helping to keep the pressure up on oil.

Pained Positioning

Prior to the banking collapse, speculative interest in oil was high and geared toward long positions — bets that the price would rise. That meant a lot of investors were left holding the bag when commodities were caught up in the wider market slide.

“With the most recent [Commodity Futures Trading Commission] CFTC report showing speculators net long 15-to-1 contracts, which is the largest directional bet in past four years, its hard to see that market wasn’t caught offsides by the Silicon Valley Bank failure,” Piper Sandler analysts remarked.

Banks and funds had roughly 320 million bbl counting on price increases when Brent was around $83/bbl. As prices dropped, these players saw incentive to liquidate risky bets and shore up other operations, as well as build cash reserves, feeding into the sell-off. Waves of algorithmic selling joined in and amplified the move, triggered both by the volume of activity and by oil and products breaching several key support levels.

The latest data from the CFTC that will capture the extent of the sell-off will be released on Friday.