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Commodities Week Ahead: Oil Eyes Worst Quarter in 3 Years on Banking, Fed Whammy

Published 03/27/2023, 05:08 AM
Updated 08/14/2023, 06:57 AM
  • Crude futures looking at double-digit losses for quarter, without adequate rebound
  • Banking crisis lumbers on, looking for next victim with shaky balance sheet
  • Uncertainty over Fed feeds volatility in oil despite talk of just one more rate hike

The end of the first quarter dawns on markets this week, and it’ll be a quarter that oil bulls would rather forget.

As things stand, crude prices are set to lose as much as 14% for the January-March period unless they get a meaningful rebound before the week ends.

Assuring longs in the game that things may be looking up for them appears to be harder than thought as the banking crisis that began earlier this month lumbers on, like a predator in the dark, ready to swallow its next poorly capitalized victim or one that’s taken too much risk on the balance sheet.

Headlines about troubles at Deutsche Bank (ETR:DBKGn), Germany’s biggest lender, have heightened jitters across markets since late last week. After the collapse of two U.S. banks and the demise of major Swiss investment bank Credit Suisse (SIX:CSGN), credit default swaps at Deutsche — which serve as the cost of insuring the bank against a potential credit crunch — surged to five-year highs Friday, prompting a mass dump of its shares.

On the oil front, after a weak start on Monday, crude futures turned green by early afternoon trade in Asia, although traders braced for volatility for the rest of the week.

U.S. West Texas Intermediate, or WTI, crude was hovering above the $70 line by 03:16 ET, up 91 cents, or 1.3%, on the day. WTI finished up just 3.8% last week as news of troubles at Deutsche Bank cut short its recovery from the previous week’s plunge of 13%.

Crude Oil Daily Chart

Despite WTI’s return to the positive, Sunil Kumar Dixit, chief technical strategist at SKCharting.com, had an ominous warning about the U.S. crude benchmark.

“If March closing comes below the 200-Month Simple Moving Average of $72.62, WTI runs the risk of a correction digging deeper into the 100-Month SMA of $58.90 over an extended period of time,” Dixit said.

U.K. Brent crude was at $75.39, up 80 cents, or 1.1%, on the day. Brent finished up 2.8% after last week’s near-13% tumble.

Brent Crude Daily Chart

For the first quarter, WTI is on track to lose around 14% while Brent is looking at a slump of more than 12%. It would be the worst quarterly loss for both since the outbreak of the coronavirus pandemic in 2020 which practically destroyed demand for oil at one point.

Concerns over increased geopolitical tensions also kept investors wary of crude, after Russian President Vladimir Putin said he will station tactical nuclear weapons in Belarus, escalating tensions with NATO over Ukraine. The bloc criticized Russia’s move.

Many also worry that other nasty surprises are lurking as the series of aggressive rate hikes by the Federal Reserve over the past year ripple through the economy.

Fed Chair Jerome Powell said banking stress could trigger a credit crunch with "significant" implications for a slowing U.S. economy.

While Fed officials continue to see additional rate hikes as a strong possibility, financial markets are now favoring the likelihood of a no hike at all at the conclusion of the central bank’s next policy meeting in May.

Wei Li, global chief investment strategist at asset management giant BlackRock, said the banking crisis combined with the Fed’s actions have sapped appetite across risk assets.

“The market is very nervous at this point and investors are acting first and looking into the nuances later,” Li said. "It's understandable because it’s not super clear that this is definitely contained."

It’s set to be a much quieter week on the economic calendar - the highlight will be Friday’s core PCE price index - the Fed's favored measure of inflation. It accelerated in January, adding to concerns over the prospect of a more hawkish Fed.

Consumer confidence data for March is due on Tuesday and will likely show the impact of stresses in the financial system. Other reports include data on pending home sales, revised GDP and initial jobless claims.

Several Fed officials are also due to speak during the week, including Fed Governor Philip Jefferson, Boston Fed President Susan Collins, Richmond Fed President Tom Barkin, and governors Christopher Waller and Lisa Cook.

***

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

Latest comments

You mentioned that the oil could go under $60 in last week. See what happen today. “In oil, WTI could go beneath $60 without a rebound, though $58 might be bottom”on March 20th200 week SMA is nonethess in this case.
one day I want it to say Barani has a position in this commodity!
The current bounce back from 200 week SMA is into play.
More likely bouncing from support made in nov 2021 at 66 levels.  You might not remember me but during my last interaction with you a few months ago when Oil was at 100-110, this level of 65 usd was predicted. Imo, Oil has further downside to go. My personal target are at 45 usd over the course of next few months. Every rally is a great chance to short.
How can it be the worst quarter ever when oil is still 70 a barrel? Doesn't sound right.
Do the math. At the time of writing, the quarterly loss for WTI was between 13 and 14 percent. Simply because oil is at $70 now, it doesn't negate that loss. WTI closed 2022 at at above $80
Good summary of the situation. On a personal note, I am looking forward to further downside across the enegy sector. There's nothing I love more than buying cheaper
What is the best energy stock for ng exposure?
depends on what you're looking for. There's only one NG ETF that I know of: UNG. If you're looking for a company that pays dividends, check out Nation Fuel Gas (NFG). Be careful, though, NG is a volatile commodity. This is NOT investment advice
Your updates help immensely in our financial investments. Thanks!
Thanks much, Shaun. Truly appreciate. Bests.
lmao they are usually wrong...jm2c Nothing personal
 Nothing personal too, but your observations are a real joke.
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