On Wednesday 3rd May, Brent Crude prices dropped below $74 for the first time in over a month. Prices declined during March as uncertainty gripped global financial markets following the collapse of Silicon Valley Bank and the buyout of Swiss-giant UBS, before rebounding above the $80 mark on the news of a production cut from OPEC+. The latest decline is, among other factors, again connected to falling confidence in the structural security of the banking system and reflects an interesting intersection between oil prices and the wider financial economy.
First Republic Bank Folds
While the collapse of Signature Bank and Silicon Valley Bank caused major shockwaves in March, in part due to the outsized role played by the latter in the startup ecosystem, the recent failure of First Republic marks a new low for 2023. The bank became the largest to fail so far this year, and the second largest in American history, and has since been purchased by JPMorgan. According to the FT, the banks’ deposits, still valued at around $100bn, will be purchased directly by JPMorgan while the losses will be shared between the new owner and the Federal Deposit Insurance Corporation (FDIC).
The recent failure has placed more scrutiny on the American regional banking system. Following the reveal that First Republic Bank witnessed more than $100bn of deposits withdrawn in Q1 of 2023, there was an inevitability about its collapse, while some attention has been drawn to which institution might be next. The BBC reported that California-based PacWest Bancorp saw its share prices tumble by around 28% in the last week, while shares in the Arizona bank Western Alliance shed 15%. Overall, the picture looks increasingly bleak since the SVB collapse, with the Economist stating that shares in American regional banks are “down 30% from two months ago” on average. The reduced regulatory oversight due for banks in America that hold less than $250bn in assets is increasingly being called into question, as are the requirements for liquidity given the possibility for rapid withdrawals in the age of modern banking.
While these changes may be implemented in due course, in the short term, the widespread uncertainty in the US banking system has again weakened oil prices which is evident in the Commitment of Traders report for Brent futures. In the week between April 18th and 25th, the net long position of Non-Commercial participants dropped by over 50,000 positions. With financial confidence shaken and the threat of a 2008-esque crisis looming in the background, the decline in Brent prices is unsurprising.
Fed Raises Rates Again
Connected to the stuttering US banking system and the bearish influence of recessionary fears on oil prices, is the Federal Reserve’s decision to increase interest rates yesterday by 0.25%. The recent rhetoric of Chairman Powell and other policy decision makers had indicated this would be the course, so this rise had been factored into markets already. Furthermore, Powell used yesterday’s announcement to indicate that this may be the end of rate increases for the time being, marking a departure from the previous rhetoric of anticipating further hikes.
Nonetheless, in the wake of a collapsed bank and another interest rate rise, there will be worries about the fragility of regional banks across America and the threat of reduced oil demand through recession. It is possible that speculative flows will retreat from commodity markets in the coming weeks as part of a risk-off mentality; the Commitment of Traders reports will certainly be worth watching to track this. Over the coming weeks, the developments of both American banks and oil prices will shed light on the extent to which the present uncertainty is grounded in reality or more akin to a herd mentality.