March 1, 2024

Brent slumps to $73/bbl in response to US banking turmoil, threatens oil price benchmark for 2023 budget

Oredola Adeola

Brent crude (Nigeria Bonny’s benchmark) and WTI fell significantly from $82.78 and $76.68 on Friday, March 10 to $73.09 and $67.20 as of 5.40 pm on Wednesday, March 15, 2023, respectively.

EnergyDay gathered that the crude oil prices decline was a reaction to the shutdown of Silicon Valley Bank and Signature Bank, the biggest bank failure in the United States since the 2008 crisis, described as the second biggest in the history of that country.

Checks by EnergyDay showed that a further decline for more than a week is likely to threaten Nigeria’s opportunity to finance its 2023 budget which was predicated on the assumed price of $75/bbl.

The fall to $73/bbl from $80/bbl is happening for the first time since January 2023, and there are speculations that more people in the US may be withdrawing their money from their banks in the coming days.

A spike of such, according to analysts, could impact the immediate future of oil demand globally, therefore influencing the price swing.

Analysts attributed the decline in prices to the Silicon Valley Bank crash and the United States Federal Reserve -which is the central bank of the US- the Fed’s aggressive rate hikes over the past year.

They noted that Fed’s imposition of a series of rate increases, among other things, hurt many of SVB’s startup clients.

Signature Bank, whose customers heard the SVB news on Friday, made a run on the bank, withdrew deposits worth some $10 billion, and by Sunday, the authorities had to interfere and seize the bank in what was quickly dubbed the third-largest bank collapse in U.S. history.

That makes two of the top three banking collapses in U.S. history happen within a couple of days of each other.

The analysts disclosed that rate hikes also hurt the profitability of Treasury bonds, to which Silicon Valley Bank and Signature Bank appeared to have had significant exposure.

Reuters also said that exposure and the Fed’s rate policies resulted in Treasury bond losses of $1.8 billion for SVB.

It was also clear that Inflation worries about the United States have significantly weighed on benchmarks, causing both Brent crude and West Texas Intermediate to fall below $80 per barrel.

Meanwhile, the market trend on Wednesday showed that oil prices began to recover following an update by OPEC about Chinese oil demand.

The cartel said it expected demand for crude from China to rise by 710,000 barrels daily this year.

This was an update from a forecast demand increase of 590,000 bpd for China in OPEC’s last month report.

However, OPEC also cautioned against too much optimism about oil demand, saying that, “The rapid rises in interest rates and global debt levels could cause significant negative spill-over effects, and may negatively impact the global growth dynamic.”

The U.S. Energy Information Administration reported an inventory build of 1.6 million barrels for the week to March 10.

This was compared with an inventory decline of 1.7 million barrels estimated for the previous week and the first decline in crude oil inventories since the start of the year.

At 480.1 million barrels, crude oil inventories are 7 percent above the five-year seasonal average, the EIA said.

This was also compared with an inventory draw of 1.1 million barrels for the previous week and average daily production of 9.6 million barrels.

In middle distillates, the EIA reported an inventory decline of 2.5 million barrels for the week to March 10, with production averaging 4.4 million barrels daily.

This is compared with a modest inventory build of 100,000 barrels and average daily production of 4.5 million barrels daily for the week to March 3.