The fallout from last week’s SVB crisis sent worrying signals across global financial markets, and caught crude oil and other commodities in the downdraft.  Oil prices tumbled on fears that the crisis would spread, feed into the physical economy, and cause a potential economic slowdown. The events, however, also saw even the most ardent bulls (Goldman Sachs) change their oil price outlooks as hedge funds began buying oil put options. 

WTI crude sank below $65 per barrel and Brent was down about 10 per-cent on a weekly basis. The price decline was accentuated by forced selling of speculators who had built up bets on higher prices in recent weeks - assuming that Chinese oil demand would recover and Russian oil exports would wane in response to strengthening sanctions. Russian oil flows, however, proved more resilient than previously thought. Furthermore, swelling oil stocks, signaling weak demand because of the mild winter, could not be ignored by the markets.

Gold (and other precious metals), on the other hand, saw increased demand as investors increasingly sought for a safe haven for their investments. As a result its price rose above $2000 an ounce, for the first time in a year.   

The irony of last week’s events is that the Saudi government is now paying the price, after the Saudi National Bank ruled out putting up more cash for Credit Suisse. Not only did Credit Suisse shares plunge, resulting in a UBS takeover and a $1 billion Saudi loss, but also did it trigger a macro meltdown that carried Brent and WTI with it. 

Outlook

The ultimate impact on commodity markets will depend on the degree of transnational contagion following the collapse of SVB and UBS' acquisition of Credit Suisse. Spreading of the crisis will likely affect the physical economy and halt demand for oil, resulting in more price declines. Containment, on the other hand, assures traders that the physical economy will be relatively unaffected, allowing prices to gain steadily.

But there are more factors at play. The financial turmoil affected the Fed’s monetary tightening, the effects of which will trickle down into commodity markets, specifically crude oil. Wall Street earlier used the SVB crisis to demand that the Fed does limited or no more monetary tightening, until it is certain that the economy is sound and it won’t accelerate towards recession. Fed officials, on the other hand, argued that they have the tools to handle the SVB contagion and it is more important that the fight against inflation continues with more rate hikes. A hawkish stance on interest rates will raise consumer and manufacturing costs, which will reduce demand for oil and likely result in a price drop. 

Inflation, however, showed signs of slowing down with the CPI rising 6 per-cent in February, down from 6.4 per-cent in January. As a result, the Fed increased its rate by 25  basis points, instead of the more hawkish 50 basis points. The Fed, however, did not rule out increasing its rate in the future. In line with the Fed, the BoE also increased its rate by 25 basis points, after its annual inflation rate jumped to 10.4%.  

Price declines have also raised the prospect of the U.S. government buying oil to replenish its strategic petroleum reserve (SPR) - a move that could stabilize demand. The White House set a price range of $67-72 per barrel where it would buy back crude oil, and prices are currently below the bottom range. The Biden administration, however, has not committed yet and stated to view the situation day-to-day. 

On the OPEC(+) side, Saudi and Russian officials met to discuss the stability of global oil markets. Price declines have raised the prospect of intervention from OPEC+, and news of the Ruso-Saudi meet-up was enough to see oil prices gain some currency and raise beliefs of some kind of intervention. 

In the longer-term, price declines could be upset by increasing Chinese demand. On Wednesday, the IEA said that China is expected to drive a two-million-barrel rise in the world’s daily oil demand this year, pushing it to a record 102 million. Expecations in the oil market, however, vary, because the Chinese government set its growth rate target at a modest 5%, signaling a changing economic environment, which could impact oil demand.. 

Stronger fundamentals ultimately will decide whether oil prices go up to down. The expectation now is that fundamentals will reassert over time, meaning that the banking turmoil impacted commodity markets only in the short-term. Ultimately, however, this rests on the degree of contagion in the financial system. Ongoing developments in the financial system, Fed interest rates, SPR buybacks, OPEC intervention, and Chinese demand, therefore are key events to watch for in the future.