Oil drops 6% and heads for worst day since July as banking crisis routs markets

Oil production in Azerbaijan

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Oil prices fell on Wednesday as traders feared a looming banking crisis could hurt global economic growth.

West Texas Intermediate futures fell more than 6% to $66.85 a barrel. It would be WTI’s biggest one-day drop since July 12, 2022, when it plunged 7.9%. Brent, the international benchmark, slid 5.8% to $72.98 a barrel.

“The oil market is going to be stuck in a surplus for most of the first half of the year, but that should change until we see a major policy error from the Fed that triggers a severe recession,” Ed said. Moya, senior market analyst at Oanda. “Now near mid-$60, WTI Crude’s fall is at the mercy of the deteriorating macro picture.”

A retest of October lows could add further downside pressure on WTI crude, he said, adding that energy stocks could struggle given the weakening demand outlook and surplus likely to persist in the short term.

“Longer-term views still support energy in your portfolios, however, as many oil giants have strong balance sheets that support continued buybacks and dividends,” he added.

The decline came as global risk markets sold off following news that Credit Suisse’s biggest investor, the Saudi National Bank, would no longer provide aid to the troubled bank. The news caused the bank’s US-listed shares to plummet more than 20%. It also raised concerns about the state of the global banking system less than a week after two US regional banks failed.

Stress from smaller banks has led Goldman Sachs to revise down its US GDP growth forecast.

“Small and medium-sized banks play an important role in the US economy,” Goldman economists wrote. “Banks with less than $250 billion in assets account for approximately 50% of U.S. commercial and industrial loans, 60% of residential real estate loans, 80% of commercial real estate loans, and 45% of consumer loans.”

“U.S. policymakers have taken aggressive steps to shore up the financial system, but concerns about stress at some banks persist,” they added. “Continued pressure could cause smaller banks to become more cautious about lending to preserve liquidity in case they need to meet depositor withdrawals, and a tightening of lending standards could weigh on aggregate demand. “

The Federal Reserve is expected to hold a policy meeting next week. At the start of this week, traders had forecast at least a 25 basis point rate hike. However, CME Group’s FedWatch tool now shows nearly a 2 in 1 chance that rates will stay at current levels.

– CNBC’s Christopher Hayes contributed to this report.

Correction: Oil was heading for its worst day since July. A previous headline distorted the timeline.

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