Commentary: Banking ‘Contagion’ Infects Global Oil Markets

What does the industry at large have to fear from a few failing banks? Many lending institutions have kept oil and gas producers at arms’ length – or further – since the shareholder uprising of 2017 demanded a slowdown.

Nevertheless, banking crises and concerns weigh on consumer confidence, which in turn impacts spending and all things related to demand.

And therein lies the rub.

Inside the first half of March, two regional U.S. banks failed and a third one got perilously close. As the uncertainty spread around Wall Street, commodity futures took a dive along with that of many financial institutions and other sectors.

Barclay’s revised oil price forecasts downward a week ago to $92/bbl Brent and $87/bbl WTI — on March 17, Brent closed out trading at $72.58/bbl and WTI ended the day at $66.37/bbl.

It was WTI’s lowest point since December 2021.

Third time’s the charm?

By the time two regional U.S. banks collapsed mid-March, a third financial institution’s existence was poised for collapse. 

First, the implosion of California-based Silicon Valley Bank shook Wall Street. Then Signature Bank in New York went belly-up.

The Treasury Department has vowed to shield those with cash in both defunct institutions with a “systemic risk exception,” an effort that Treasury Secretary Janet Yellen told Congress will protect the U.S. economy by strengthening public confidence in the nation’s banking system.

Then the tremors started at First Republic Bank.

Yellen announced an emergency intervention designed to stave off additional panic with a coordinated $30 billion infusion of cash deposits.

The point this time? To send the signal – again – that all is fine in the U.S. financial system.

 “They’re trying to create a firewall to protect themselves from further angst about the banking systems and continued bank runs,” Mark Zandi, an economist at Moody’s Analytics, told The Washington Post. “It’s about shoring up the weakest links in the banking system and, in so doing, inoculating themselves from the fire getting to them.”

‘People are afraid.’

The banking contagion comes at a point ripe for something like chaos.

Several underlying weaknesses have raised concern about an economic slowdown even as the world emerged from its pandemic lethargy.

Employment doesn’t seem as strong as U.S. Labor Department surveys would suggest, John Paise, president at Stratus Advisors, told Hart Energy. The jobs that are coming back are generally low-paying, especially in the services sector where most of the growth is occurring. Wage growth remains anemic. Consumer debt is on the rise, along with interest rates. Housing values are declining. And then, there’s inflation.

“People are afraid,” Paise said.

The non-partisan, non-profit team of analysts at The Conference Board reported slippage in consumer confidence with each monthly release of its index this year. The board's expectations index – a measurement of consumers' short-term outlook on income, business and labor conditions, fell to 69.7 in February from 76 in January.

Anything less than 80 often signals a recession within 12 months, according to the board’s data. But it’s also worth noting that the level has registered below that threshold for 11 of the last 12 months.

The fear factor doesn’t stop at the U.S. border. Europe continues to struggle with energy prices and the ripple effects of Russia’s war on Ukraine. Central banks are tightening. Bankruptcy is on the rise.

All of this – and really, there’s much more at play within the realm of current scatological events – amplify the fear factors that influence consumer demand for goods, services and the energy.

Demand for oil within the U.S. remains low, well below that of 2019. And demand from China, which most experts said would surge, is limping along. Meanwhile, supply is abundant.

“We have plenty of inventory right now,” Paise said. “People are closing out their positions, and it's really creating pressure worldwide. We’ve hit $65 and some change on WTI. So yes, there's a nervousness of that at this point.”

Indeed, it appears the depth of crude’s plunge is at the mercy of the macro.

Most U.S. producers can turn a profit a profit at WTI prices lower than $65 – and indeed, many are much better-positioned to do so now than before thrift became the industry’s dominant trend. Still, capital plans for the year are in place and shareholders and investors have their own expectations for performance.

“They can keep going, but [persisting $65 WTI prices] will definitely have a negative effect,” Paise said.