Crude oil prices face the possibility of plummeting to $40 per barrel as financial market volatility exposes uncertainties in global supply and demand dynamics. Despite strong demand from China, the oil market is feeling the effects of a market selloff, which could lead to reduced consumer spending and a significant drop in oil demand. Some analysts predict that if the current turmoil spreads across the regional banking system, Brent crude prices could hit a low of $40.
The recent collapse of Silicon Valley Bank has revealed weaknesses in the global financial system, triggering a market selloff that drove oil prices to their lowest point in over a year. In response to a sharp drop in share price, Credit Suisse announced a facility to borrow up to $54 billion from the Swiss central bank in an attempt to reassure investors.
Oil market volatility has escalated as West Texas Intermediate crude futures fell to $65.89 per barrel, down nearly 18% from Thursday’s settlement levels, marking their lowest price in almost 15 months. Similarly, Brent crude dropped to $72.10 per barrel. Analysts are growing increasingly convinced that bearish economic forces are outweighing the bullish impacts of China’s economic recovery and sanctions against Russia.
Natasha Kaneva, Head of Global Commodities Research at JP Morgan, anticipates that the oil market will remain in surplus for the next two months, with oil prices under fundamental pressure through May as global inventories potentially increase by another 46 million barrels. She believes that prices could trade between $70 and $80, barring two potential catalysts.
First, a change in OPEC’s strategy could prompt the group to make further production cuts. If this occurs, Kaneva estimates that quotas could be reduced by approximately 400,000 barrels per day, significantly impacting the 100 million barrel daily oil market. Second, an announcement by the US government that it will refill its strategic petroleum reserve, currently at its lowest level in decades, could cause prices to rise due to substantial oil purchases.
However, without these catalysts, oil price trends may hinge on the severity of the ongoing banking turmoil. Analysts warn that recessions induced by a financial crisis tend to be two to three times worse for oil than other recessions. According to Kaneva, if the current troubles spread throughout the regional banking system, Brent crude could drop as low as $40 per barrel.
Over the past three quarters, 120 million barrels of oil have accumulated in global storage as supply exceeded demand. Analysts do not foresee this balance shifting for months, even with China’s reopening. Although constrained global supply and China’s demand recovery are expected to support prices in the future, OPEC sources believe that the current price weakness is due to financial drivers rather than supply and demand imbalances and anticipate market stabilization.
