Oil prices settle lower, paring gains for the week, as European bank worries rise

By Myra P. Saefong and William Watts

WTI oil gains more than 3% for the week

Oil futures settled lower on Friday, taking back a portion of this week's bounce, as renewed worries over the U.S. and European banking sectors revived fears of a credit squeeze and an economic downturn.

Price action

Market drivers

There are some expectations in the market that the "major central banks are going to pause their rate hikes, but that's not to say the economy will find relief," said Fawad Razaqzada, market analyst at City Index and FOREX.com. "We have seen some of the implication of higher interest rates on the banking sector already in the last couple of weeks, but the full impact on the economy is yet to become apparent."

For now, "the general feeling is that global economic activity will slow down as a result of higher interest rates, which should hurt demand for oil," he said in market commentary.

U.S. and European bank worries were back in the spotlight Friday as Deutsche Bank (DBK.XE) shares dropped in European trade and shares of UBS AG (UBS), which has agreed to buy Credit Suisse, also fell.

The oil market's "most considerable risk right now is tighter credit, which could negatively influence global oil demand," said Stephen Innes, managing partner at SPI Asset Management, in Friday commentary.

Crude prices fell sharply last week, trading at 15-month lows, as concerns rose over the health of the banking sector following the collapse earlier this month of California's Silicon Valley Bank.

Also see:Why retail diesel prices may soon fall below $4 a gallon

"Oil prices, which had become caught up in the downward pull of the market turmoil to a considerable extent, were able to recover for a short time, though at $77 Brent still remained 10% cheaper than it was at the start of the year," said Barbara Lambrecht, commodity analyst at Commerzbank, in a note. "This is attributable on the one hand to the still elevated risk aversion and on the other to the surprisingly high supply."

Outside of a major global banking crisis, however, "we see a relatively limited impact on supply or demand," said Innes.

As markets stand right now, our "bullish play" is for the Organization of the Petroleum Exporting Countries to "stay the course" on production, he said. With the weaker dollar allowing better China fundamentals to shine through, "finally we are on the same page with Goldman Sachs in that we now think we could enter a small global oil deficit as soon as June."

Also see:Baker Hughes reports a weekly rise in active U.S. oil-drilling rigs

Commerzbank's Lambrecht noted that any further brightening of sentiment in China's manufacturing sector could boost economic optimism.

On the supply side, traders are focused largely on Russia, Lambrecht wrote, where the production cut of 500,000 barrels a day that was announced for March is likely to be confirmed by initial data, "though the production level could turn out to be higher than anticipated nonetheless."

Meanwhile, reports on Thursday said U.S. Energy Secretary Jennifer Granholm told U.S. representatives that it may take years for the nation to refill its Strategic Petroleum Reserve, with some analysts noting that the news helped pressure prices for oil. "This year, it will be difficult for us to take advantage of this low price," Granholm said.

The Biden administration last year announced the emergency sale of 180 million barrels of SPR crude to help lower gasoline prices, and has said it would refill the reserve when oil prices fell to around $70 a barrel.

-Myra P. Saefong

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03-24-23 1510ET

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