Oil prices fall hard on fears of banking contagion, the latest sign of forces outside the industry’s control
by Scott McKnight, PhD
22 March 2023
Top-line takeaways
Oil prices had been falling in fits-and-starts since summer 2022 but fell hard last week, dropping nearly 10% to hit a 15-month low
A series of bank failures triggering an economic recession drove the sell-off of energy stocks
The world isn’t short of oil (yet anyway), but the markets may be nearing their bottom
Oil markets took one of their roughest rides in years in the third of week of March, with oil prices down nearly 10% in that week alone. Oil prices had been tumbling down an unpaved road since their peak of $122 per barrel in summer 2022, but fell really hard last week, dropping nearly 10% to hit a point not seen since December 2021: $72 per barrel for Brent crude (ICE) May 2023 contracts and $66/b for April 2023 contracts of WTI. Natural gas wasn’t any better, down to $2.28/MMBtu for April 2023, having taken a consistent beating since the turn of the new year.
What caused the slide
General economic panic set in around how far several banking collapses would spread, led by Silicon Valley Bank (SVB), Signature Bank and Credit Suisse. Investors responded by pulling money out of oil markets and other risky assets, and instead found shelter in safer government bonds. On March 15 alone, energy stocks fell nearly 6%. Financial institutions and their trend-following algorithms made matters worse, unloading crude futures to cover the risk of further price falls, adding downward pressure to downward momentum.
Stopping the slide
Bearish feeling wasn’t easy to shake, but the temporary bottom may be close. Several actions may help prevent a further decline.
First, the Swiss central bank stepped in to prevent any Credit Suisse-induced contagion, bolstering market confidence that this banking failure isn’t a repeat of 2008.
Second, energy ministers from Saudi Arabia and Russia came together to announce that their countries would take action if the slide continued. The two countries had cooperated in many production cuts prior to this, the latest in October 2022. That cut only temporarily boosted prices, but did show the two countries would continue to co-lead in managing global oil supplies—or at least attempting to do so—despite the many setbacks (Ukraine, the US, the pandemic price collapse) that could have undone their OPEC+ arrangement.
Third, America’s Department of Energy pledged to refill some of its Strategic Petroleum Reserves (SPR), opening another outlet of demand. The Biden administration had partially emptied the SPR last year in an emergency bid to soften gasoline prices.
The moves haven’t fully halted the slide in oil prices, but they have slowed them.
No one spared
Every name in the energy game was down. From the supergiants to refiners to oilfield services companies to pipeline operators to crude shippers, shares were all lower on the sudden slide in crude prices. Shares of the biggest names like ExxonMobil and Chevron were down 5% and 4.3% respectively, as well as refiners like Marathon and Valero were down 4% and 5.5% respectively. Halliburton, the oilfield services giant, saw its shares down 9%.
What a difference a year makes
The price drop made energy stocks the worst performers on the S&P, a far cry from 2022 and 2021 when energy shares were among the market’s top performers. That two-year winning streak was never going to last, but the suddenness and sheer flexibility of global energy markets (one of our top 10 takeaways from 2022) may have caught some by surprise.
Above all, we may be coming to the realization that the world still has plenty of oil and gas—in production, in storage and in readily accessible reserves. The US shale boom remains strong, despite some warning signs of declining sweet spots. US exports of crude and natural gas have filled demand gaps in Europe that were suddenly opened by sanctions on Russian energy exports—and indeed allowed those sanctions to be applied in the first place. For Russia’s part, too, that country’s crude and oil products have continued to flow—to China, India, to and through Turkey, as well as to Africa—despite bans, restrictions and caps imposed by the G7 and its wealthy allies.
Last week’s price collapse should tell us something: what will make or break oil prices may have nothing to do with the oil business—its supply, its transport or refining capacity—and instead have everything to do with factors entirely out of its control—pandemic restrictions in major oil importing countries, reckless bankers making awful bets on housing prices or the Federal Reserve board tinkering with interest rates.
