Oil prices were turbulent on Monday, as the collapse of the Silicon Valley Bank caused market uncertainty. WTI price dropped to $72.5 per barrel in early trading, but pared some losses later in the day, climbing to $76 per barrel. If the WTI price declines, it may encounter support near $70.2 per barrel, while resistance may be found near $80.8 per barrel.
The collapse of the Silicon Valley bank last week had a mixed effect on oil prices. On one hand, it raised recession concerns, which drive oil prices down. On the other hand, this event may steer the Fed toward a less hawkish direction, which will ultimately benefit oil prices.
Fears of a slowdown in the U.S. economy put pressure on oil prices. Recession concerns run high and aggressive rate hikes stifle economic activity, lowering oil prices. Fed Chair Powell’s testimonies before the Senate Banking Committee last week were more hawkish than anticipated, putting pressure on oil prices.
Last week market expectations of the Fed’s next rate hike bounced back and forth between 25-bp and 50-bp. Powel’s testimonies raised market odds of a 50-bp rate hike early in the week. The collapse of Silicon Valley Bank on Friday though brought market odds back down to 25-bp. This week some analysts predict that the Fed might even pause rate hikes completely until the crisis is over. The SVB collapse may steer the Fed towards a less hawkish direction, in fear of contagion in the financial sector.
Concerns over China’s economic recovery also put pressure on oil prices. China set its GDP growth target at approximately 5% for 2023, which was lower than last year’s target of 2022. Oil prices pulled back as China’s economic growth appears to be slow. China is the world’s largest energy importer and prolonged lockdowns have dampened oil demand. The Chinese government has eased some of its strident Covid regulations, abandoning its zero-Covid policy, fuelling hopes of economic recovery.
Oil prices are supported by concerns that Russia will cut its oil exports. G7 leaders set a price cap on Russian oil exports on February 5th and Russia has announced plans to reduce oil output by at least 500,000 barrels per day as a retaliation for the price cap on the country's oil exports.
This week US inflation data are expected to affect oil prices, as they may determine the pace of future rate hikes. CPI data on the 14th and PPI data on the 15th are this week’s most highly anticipated fundamentals.
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