U.S. crude futures slipped about 7% Tuesday, selling for as low as $66.30 a barrel, before edging slightly higher said WSJ Renew Subscription. Brent crude, the global price gauge, hit $72.12 in morning trading. Those marked the lowest intraday levels for both benchmarks since December 2021, according to Dow Jones Market Data.
The recent price drop is good news for motorists fueling up at the pump, potentially extending monthslong declines of gasoline and diesel costs. But it also highlights investors’ fears that spreading tumult in the banking sector could slow the U.S. economy.
After the Kremlin’s invasion of Ukraine last year sent U.S. crude prices higher than $122 a barrel, ample supplies have dragged prices lower in recent months. The U.S. has produced gushers of oil, building commercial inventories, while Russian crude has kept flowing into international markets despite a European Union ban of most imports and shipping challenges due to Western sanctions.
The recent banking turmoil, accelerated Wednesday when Credit Suisse shares hit a record low, has instead highlighted questions about global demand. In monthly forecasts released this week, OPEC said expected growth in oil consumption by a reopening Chinese economy could be offset by slowdowns in Europe and the U.S.
“The energy complex appears to be connecting the dots between the recent banking issues and a possible recession,” oil-consulting firm Ritterbusch and Associates told clients Tuesday.
Beyond those fears, financial traders have also frantically shifted investments in recent days to minimize their exposure to the banking fallout.
Many investors have piled into safe-haven assets such as government bonds in a move some analysts say is pulling money out of oil markets. UBS told clients Wednesday that financial institutions are amplifying the downward move by unloading crude futures to cover the risk of prices dropping below the strike level of put options they had previously sold.
At the same time, trend-following trading programs on Wall Street have taken cues from the market and quickly moved into bets that prices will fall, said Daniel Ghali, director of commodity strategy at TD Securities.
Mr. Ghali said the shift in the algorithmic-driven strategies has effectively maxed out as of Wednesday, adding, “We estimate that downside flows are likely to run out of steam.”
There are other reasons to believe the slide could be nearing its end. In October, OPEC slashed production in a move Wall Street saw as evidence the cartel would protect prices. The U.S. Department of Energy has also pledged to refill some of the skyscraper-sized storage tanks in its Strategic Petroleum Reserve, which President Biden partially emptied last year in an emergency bid to cut gasoline prices, when U.S. crude trades between $67 and $72.
Meanwhile, this month’s 13% drop in U.S. crude prices has begun rippling outward to shares of energy companies. Those stocks led the broader market higher in 2021 and in 2022 served as a haven while shares in other sectors tumbled. On Wednesday, though, there was nowhere in the oil patch to hide from losses.
Shares of refiners, Texas wildcatters, oil-field services firms, rig owners, Appalachian gas producers, coal miners, crude shippers and pipeline operators all traded lower Wednesday. By the early afternoon, Exxon Mobil had fallen about 6.1%, Halliburton dropped 11.2% and Marathon Petroleum shed 6.1%.
Investors are likely to remain cautious until the Fed’s meeting next week. The recent bank failures have added a potential counterweight to the central bank’s deliberations over hiking interest rates further, analysts say—a decision that could have big implications for the economy’s appetite for oil.
Should the Fed slow or pause its path forward, that could leave the U.S. economy running hot, said Dan Pickering, chief investment officer for Pickering Energy Partners.
“That’s probably good for the oil patch,” Mr. Pickering said. “The flip side is maybe we’ll have to raise rates more in the future.”
“Somewhere out there is an economic slowdown,” he said to WSJ Renew Subscription.