Oil prices fell more than 2% in volatile trading on Monday, as bank failures in the United States fueled fears of a new financial crisis.
Brent crude futures fell $2.01, or 2.4 percent, to $80.77 per barrel, while West Texas Intermediate crude futures (WTI) fell $1.88, or 2.5 percent, to $74.80 per barrel in the United States.
The failures of Silicon Valley Bank and Signature Bank over the weekend shook the market, raising concerns that the ripple effect, which has been blamed on the Federal Reserve’s aggressive rate hikes, could spread to other banks.
With the US Federal Reserve poised to raise interest rates further, investors are concerned that the financial system has not seen the last of the changes.
The Federal Reserve, the US Treasury, and the Federal Deposit Insurance Corp (FDIC) launched emergency measures on Sunday to bolster confidence in the banking system following the failure of Silicon Valley Bank, which led to a sell-off in US assets at the end of last week, and state regulators closing New York-based Signature Bank on Sunday.
Analysts were surprised to see oil prices fall, given that the US Federal Reserve will have a more difficult time raising interest rates aggressively, which should cause the Dollar to weaken.
The Dollar Index, which measures the US currency against six other currencies, fell nearly 1% as short-term Treasury yields fell.
A weaker dollar should make oil cheaper for holders of other currencies, thereby supporting oil prices.
In the midst of this, Goldman Sachs analysts have stated that they no longer expect the US Federal Reserve to raise interest rates by 25 basis points at its next policy meeting on March 21-22.
As Saudi Aramco CEO Amin Nasser stated on Sunday, the recovery in Chinese demand provided support.
“If you consider China opening up, a pickup in jet fuels, and very limited spare capacity, we’re talking about 2 million barrels,” he said. “As I said, we’re cautiously optimistic in the short to midterm, and the market will remain tightly balanced,” he added.
The remarks follow the announcement that Saudi Arabia and Iran had agreed to restore diplomatic relations in a deal brokered by China, potentially paving the way for the revival of a nuclear deal that would allow exports of currently sanctioned Iranian crude.
