How the ongoing banking turmoil will impact global oil prices

The oil market has seen an impact from the turmoil in the banking sector with prices dropping towards $70 per barrel this week, and banks have said financial market uncertainty needs to fade before prices stabilise.

Norbert Rücker, head of economics and next generation research, Julius Baer, said while ground had been recovered in the price, souring sentiment is likely to be apparent going forward.

He added however that it would be “too simplistic” to mainly point at sentiment, or recession fears, to explain the price drop, saying “Fundamentals continued to soften incrementally as they have for some time already.”

Rücker said the bank’s view continues to be that banking woes are unlikely to cause a recession. “While oil prices might have undershot somewhat and could see tailwinds from an eventual mood reversal, we believe that the fundamental trends largely continue their course.

“Supplies improve as Russian oil keeps flowing, US shale oil output expands, and the energy transition undermines Western world oil demand, leaving room for Asian consumption to grow. “China’s reopening is unlikely to derail these trends, but this aspect deserves monitoring. We see oil prices heading towards their sustainable market equilibrium longer term, which we put close to $70 per barrel.

“In Europe, the strike-related disruptions at French refineries temporarily cause regional supply issues, propping up fuel prices and delaying the disinflationary easing somewhat,” he added.

Swiss bank UBS, the acquiring party in the Swiss government-backed deal to rescue rival Credit Suisse, issued a statement prior to the CS collapse, saying financial market turbulence had weighed on oil prices.

“Oil prices have been very sensitive to the recent shift in risk sentiment, particularly due to the lack of supportive price fundamentals, with US oil inventories building this year.” The financial market uncertainty will need to fade before a stabilisation, followed by a recovery in oil prices can be expected, with investors needing to consider central bank actions in handling the market pressures.

The US Federal Reserve announced a hike of 25bps overnight, which Dubai-based lender Emirates NBD said signified the Fed continuing its fight against inflation.

Powell said on Wednesday that banking industry stress could trigger a credit crunch, with "significant" implications for an economy that U.S. central bank officials projected would slow even more this year than previously thought.

GCC central banks have followed suit with Saudi Arabia, the UAE and Bahrain raising policy rates by 25bps.

The Bank of England on Thursday followed the Federal Reserve and the Swiss National Bank in hiking interest rates, fighting against inflation in the face of the instability in the global banking system this month.

Meanwhile, oil prices steadied on Thursday, having hit their lowest since late 2021 earlier this week, as strong U.S. jobs data countered bearish signals from Fed Chair Powell highlighting banking sector risks and swelling U.S. crude stockpiles.