Crude oil prices plunged below US$70 and Canadian energy stocks took a beating Wednesday as market chaos continued amid concerns about a spreading bank crisis.
"We're down US$12 in two and a half days, which is obviously a very, very, very large move in crude oil," said Rory Johnston, a Toronto-based energy analyst and founder of the Commodity Context newsletter.
"I think everyone's panicking today. I think panic is the name of the game right now," said Johnston.
Global oil prices have been falling all week as concerns about the health of the global banking sector mount in the wake of the recent closures of Silicon Valley Bank and Signature Bank in the U.S.
On Wednesday, as shares in Zurich-based Credit Suisse tanked after the bank reported it had identified “material weaknesses” in the firm’s internal controls on financial reporting, concerns about a potential global economic slowdown hit crude oil particularly hard.
The North American benchmark West Texas Intermediate plunged more than four per cent on Wednesday to around US$68 per barrel. That's the lowest crude price since December of 2021, and it sent oil and gas stocks tumbling, marking the third straight day of losses for the sector this week.
Canada's energy sector was by far the hardest hit sector on the Toronto Stock Exchange Wednesday, with the S&P/TSX capped energy index losing 5.44 per cent in the day's trading.
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Johnston said for much of this year, the global oil price benchmark Brent crude had been trading in the US$78-88 range. With the reopening of the Chinese economy in the wake of COVID-19 restrictions signalling a potential uptick in demand, market sentiment on future oil demand had been generally bullish with spec positioning in crude oil contracts rising steadily over the last two months.
While the risk of a steep volatile sell-off was certainly there, "what no-one expected was a consecutive series of domino-effect bank failures," Johnston said.
Oil prices are strongly linked to the global economic outlook, and right now all the headlines for crude price demand appear to be "rather bearish," said Edward Moya, senior market analyst with New York-based foreign exchange broker OANDA Corp.
"Credit Suisse is a bank that matters and contagion risks won’t be easing anytime soon, the U.S. consumer is weakening, and China’s outlook is not looking so robust after unemployment rose and on worries over the real estate market," Moya wrote in a research note.
"Now near the mid-$60s, WTI crude’s plunge is at the mercy of how much worse the macro picture gets."
Johnston said energy traders will be closely watching next week's meeting of the U.S. Federal Reserve. While this week's banking sector selloff may have reduced the likelihood of another interest rate hike by the central bank at its upcoming meeting, markets are still jittery over the possibility that the Fed's aggressive attempts to slow inflation could tilt the economy into a recession.
Johnston said until then, it's unclear whether Wednesday's oil price slump will prove to be a short-term blip or an indication of longer-term weakness.
"Next week’s Federal Reserve meeting will be crucial for how this market views this (oil price) dip," Johnston said.
“I don’t think anyone has actually sat back and rationally assessed their outlook for the rest of the year. I think in a week or so, when the dust settles, we’ll see what the outlook actually is.”
This report by The Canadian Press was first published March 15, 2023.