The US banking crisis cast a shadow over oil prices, following the collapse of the Silicon Valley bank, during the past few days.
And with the worsening situation and increasing fears of an economic recession, crude prices fell during trading today, Wednesday, March 15 (at 07:00 pm Mecca time), by about 6%, and the price of Brent crude reached 73 US dollars per barrel.
A new report from Swiss investment bank UBS revealed that risk aversion and delta hedging are affecting oil markets.
A delta hedge is an options trading strategy that aims to hedge the directional risk associated with price movements in the underlying asset.
The impact of the American banking crisis
The UBS report – of which the energy platform obtained a copy – revealed that the financial market turmoil and the US banking crisis affected oil prices, as the benchmark Brent crude price fell by more than $10 a barrel during the last 10 days.
Although there were many questions about the reason for the severe impact of the banking crisis on the oil markets, the report ruled out that the crisis would put pressure on the demand for crude oil and its production.
The report highlighted the tendency of investors to withdraw from risky assets, such as oil, and invest in safer assets, during times of extreme market volatility.
The situation was reflected in the oil markets, and prices were affected by the recent turmoil in the financial markets, and investors are in a state of anticipation and waiting at the present time.
The report indicated that oil prices were affected by the recent changes in risk trends, especially due to the lack of fundamentals supporting prices, with the rise in US oil stocks during the current year (2023).
Analysts at UBS Bank said: “What exacerbates the decline in prices is the option market, through the so-called delta hedge, and financial institutions sold downside protection tools (selling options) to dealers in oil markets, such as producers.”
Analysts revealed that with oil prices falling below the level at which protection begins (the option exercise price, i.e. the price level at which assets can be bought or sold), these financial institutions now need to avoid having price risk on their balance sheet.
According to the Swiss Bank report, these institutions resort to selling oil futures contracts to compensate for risks.
In the near term, uncertainty in financial markets must dissipate before it stabilizes, followed by a recovery in oil prices.
Commodities analyst at Swiss bank UBS and co-author of the report, Giovanni Stanovo, believes that investors need to watch how governments and central banks react to the pressures in the markets.
“In the short term, other important factors include whether the US government will issue a tender to refill its strategic stockpile, and China’s tendency to boost crude oil purchases due to lower prices,” he said.
“Markets are likely to remain volatile in the near term, and we continue to expect that higher Chinese crude oil imports and demand and lower Russian production will drive prices higher in the coming quarters,” he added.
Swiss bank UBS expected Brent crude to trade at $100 a barrel until June (2023), while it expected Brent crude to reach $105 a barrel until the end of this year.
And in early September (2022), the bank had cut its forecast for oil prices by $15 per barrel, from $125 to $110 in 2023.
The aftermath of the Silicon Valley collapse
The collapse of the Silicon Valley bank had huge repercussions on the markets, and its impact was evident in the oil markets.
A group of analysts and experts previously revealed to the specialized energy platform their expectations for the crisis, whether oil prices will continue to deepen their losses in the coming months, and what will be the reaction of OPEC if America does not succeed in remedying the crisis.
In this regard, the advisor and expert in the field of energy in the Sultanate of Oman, former Director General of Marketing at the Omani Ministry of Energy and Minerals, Ali bin Abdullah Al Riyami, believes that oil prices will witness a limited decline, and it is possible for the OPEC + alliance to intervene if prices fall to less than $ 70 a barrel. Although the situation has nothing to do with market factors, members usually intervene for reasons directly related to the oil markets.
While the founder of the “Vanda Insights” center on energy markets, Vandana Hari, said that the collapse of the Silicon Valley bank caused panic reactions in the oil markets, and then oil prices fell, but she does not think that these losses will continue.
While the expert on energy and the Middle East, Cyril Woodershoven, indicated that the current situation raises fears of a recurrence of the Lehman Brothers crisis again.
Umod Shukri, senior advisor on foreign policy and energy geopolitics, believes that the US measures to solve the crisis will contribute to stabilizing oil prices.
Although Shukry expected OPEC and its allies in OPEC + to cut production in the event that the crisis is not controlled, energy and Middle East expert Cyril Woodershoven believes that members will not change policies, according to recent statements.
Adhere to the policy of reducing production
Sources in the OPEC + alliance have made it clear to the specialized energy platform that the drop in oil prices is a natural reaction to market conditions, and that the alliance does not intend to change production policy at the present time.
Yesterday, Tuesday, March 14 (2023), the Saudi Minister of Energy, Prince Abdulaziz bin Salman, declared adherence to the policy of reducing the production ceiling by two million barrels per day until the end of this year.
The minister threatened to stop his country’s oil exports in the event of imposing a price ceiling on supplies to global markets.
Regarding the “No OPEC” law, the minister said that these policies increase risks and ambiguity, and exacerbate market instability, and this will negatively affect the oil industry.
He stressed the coalition’s efforts to achieve stability and transparency in the oil markets.
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