Reports that regulators at the U.S. Federal Deposit Insurance Corp (FDIC) have asked banks interested in buying the failed Silicon Valley Bank and Signature Bank (NASDAQ:SBNY) or the possibility that and First Republic Bank (NYSE:FRC), the San Francisco-based lender that was cut to junk by S&P Ratings and Fitch Ratings, are exploring options including a sale, in what could be the beginning of a fire sale in the banking sector. Yet the real news are fears that these bank problems in the US have gone global and that has raised real implications for the global economy.
Oil prices plunged as a crisis of confidence plays out in the global banking sector and the competency of global central banks around the globe. Credit Suisse Group (NYSE:CS) shares and credit default swaps plunged to distressed levels before the Swiss National Bank (SNB) after some hectic hours finally pledged some support. So 50 billion Swiss francs ($54 billion) from the Swiss National Bank in what Credit Swiss called “decisive action” to boost its liquidity caused a high comeback in shares that snapped back 40% before pulling back. Someone made a lot of money if you bet on a SNB bailout yesterday.
The question then becomes as to whether $50 billion francs will be enough to stop the global banking crisis or is it just the beginning of another financial crisis. A crisis that could derail the global economy and reduce both demand and investment in the oil and gas sector. Will lenders pull their money out of Credit Swiss? Can the Swiss National Bank handle this on its own? European Central Bank, whose head Christine Lagarde previously signaled that it will take a major crisis to not raise the ECB rate by 50 basis points, now has to determine if it backs off of raising rates or stay stubborn to maintain credibility.
In the US, fed fund futures signal that the odds of the Federal Reserve standing pat at the next meeting exceeded 50% for part of the day yesterday. Predictably a lawsuit has been filed to stop Biden’s approval or partial approval of the Willow project
Yet what is clear is that central banks need to learn from history and back off the aggressive rate increases. If they don’t, it could lead to larger problems. It could undo the global financial system. We have complained before that the Federal Reserve and other central banks, after missing the early warning signs of inflation ,are now trying to correct past mistakes by being too aggressive. We have complained that the Federal Reserve members have talked too much and should allow the market to digest their previous moves before trying to jawbone the market in one direction or the other. The micromanaging of their message makes it harder for banks to adjust their position.
The financial sector and the oil and gas sector took the brunt of the pain for the credit Swiss and banking debacles. Not only did it lead to risk managers at big banks around the globe to tell their trading arms to reduce risk causing a liquidation of positions along with increased margins, but it also caused a surge in the value of the dollar which also put further downward pressure on oil and gas. This could become a problem because it could reduce much needed investment in the oil and gas sector when we need it most if the economy doesn’t collapse the investment in the oil and gas sector is not sufficient to meet demand expectations going forward.
The risk is that we will see a pullback in production is real because of the plunge in oil prices. This might be a good time for Biden to step in and buy oil for the Strategic Petroleum Reserve. Not only will it stabilize prices, but it may stop potential liquidity problems for smaller oil and gas companies. It could also save some jobs in the oil and gas sector. The money for the purchase is already there. Besides, it wouldn’t be just oil and gas because green energy companies will also get hit and potentially lose a lot more money if we have a plunging oil price and a contacting economy.
On the geopolitical front it appears that Biden’s policy of trying to make Saudi Arabia a pariah state is pushing Saudi Arabia closer to our enemies. The initiative by China to foster peace talks between Iran and Saudi Arabia seemed to be bearing fruit. The Wall Street Journal is reporting today that Iran is agreeing to stop aiming the Houthi rebels in Yemen is part of a larger peace pact with Saudi Arabia.
In Europe it appears that the price cap on Russian oil will not change. Biden told the EU that according to the Wall Street Journal the US does not support a lower price cap on Russian crude. The reason is that they know that if they lower the price cap, the odds of an oil price showdown with Russia more than likely would lead Russia to cut supply. Saudi Arabian OPEC signaled that they would not accept any price cap on their oil at any time. If you put a price cap on Saudi oil, then don’t expect to be able to buy oil directly from Saudi Arabia either.
Did the oil inventories yesterday matter? Nope, not too much. But if it were not for the global economic turmoil, it would have been very bullish. In fact, today there was also a very bullish report from Joint Organizations Data Initiative(JODI) that said that global oil production has plunged to a seven-month low in January. JODI reported that global crude production fell by 365.000 barrels a day and that was the 3rd consecutive month where global production has fallen.
This comes after the Energy Information Administration yesterday reported that Petroleum demand in the United States increased by 1.9 million barrels a day. Overall total commercial stocks of petroleum fell by 1.9 million barrels last week. The EIA did report that crude supplies in the US increased by 1.5 million barrels a day but that was offset by a large 1.9-million-barrel drop in Cushing, OK supply. They said that U.S. oil production remained flat at 12.2 million barrels a day. They did come back with another big adjustment of 2.6 million barrels a day and the overall crude supply number.
Overall, they said that crude demand increased by 2.1 million barrels a day and inputs into refineries increase by 431,000 barrels a day in US exports increased by 1.7 million barrels per day. The EIA also said that ready to use gasoline stocks fell by 3.2 million barrels a day, but overall stocks fell by 2.1 million barrels a day. Gasoline demand was up by 92,000 barrels a day last week according to the EIA. Ultra-low sulfur diesel stocks fell by 1.7 million barrels last week total distillate stocks fell by 2.5 million barrels. The EIA said that demand increase last week by 229,000 barrels a day.
So, for oil right now, we have two markets. One market that says that demand is solid, and supplies should tighten. Another one that is fearful that the banking crisis is going to create a situation where demand craters. At this point, I am more concerned that the investment in oil gas is going to suffer. That is going to lead to a bigger oil price spike down the road. Yet in the meantime you can’t fight the market turmoil. It will be interesting to see if Christine Lagarde and the ECB can create the type of confidence that the markets going to need to recover. In the meantime, it’s trade by the seat of your pants.
Not surprisingly a lawsuit has been filed against Biden’s approval of the Willow project in Alaska.
Natural gas was not immune from the global market fallout. If we see stability in the global markets, we should get a pop in natural gas as well.