Banking Crisis Has Triggered Capital Flight From Oil To Gold

The sudden collapse of Silicon Valley Bank has sent shockwaves through the entire financial sector and marked the biggest bank failure since the 2008 financial crisis. Being the only publicly traded bank focused on Silicon Valley and startups for four decades, the swift collapse has particularly rattled the venture capital community and left climate tech startups in a crisis. 

But the energy markets have not been spared, with oil prices crashing to multi-year lows following the ensuing banking crisis. Oil prices crashed spectacularly, with WTI crude falling from $80.46 per barrel just 10 days prior to the $67 range, while Brent declined from $86.18 per barrel to the $73 range, levels they last touched in December 2021. Commodity analysts at Standard Chartered warned that the oil price crash had been exacerbated by hedging activity-specifically, due to gamma hedging effects, with banks selling oil to manage their side of options as prices fell through the strike prices of oil producers put options and volatility increases. The negative price effect has been exacerbated because the main cliff-face of producer puts currently occupies a narrow price range. 

And now the latest Commitment of Traders (CoT) report published by the Commodity Futures Trading Commission (CFTC) has revealed where that oil money flowed to.

Commodity analysts at Standard Chartered have combined the CoT data with the equivalent Intercontinental Exchange (ICE) data and found that there was heavy selling of crude oil and gasoline, combined with a rapid move by funds into precious metals four days after the collapse of Silicon Valley Bank but six days before Brent hit a 14-month low of USD 70.12 per barrel. 

Indeed, silver and gold saw a net increase in long positions while all other classes of crude and crude products apart from heating oil and natural gas saw a net increase in short positions. Related: Will Brent Break Below $70 This Year?

During that period, money-manager net selling across the four main Brent and WTI

Contracts hit a staggering 128.1 million barrels (mb) in the week to 14 March. Meanwhile,

StanChart's crude oil positioning index fell 41.6 w/w to -67.0, the largest single-week decline in six years, while its gasoline positioning index fell by 36.4 to -6.6, marking the first time it had turned negative in 20 months.

Not surprisingly, gold prices have jumped nearly 9% since March 10, and now sit at $1,995/Oz, not far from the all-time high while silver prices have rocketed over 16% to trade at $23.35/Oz.

Source: Standard Chartered Research

Banking Fears Linger

Previously, StanChart analysts had said that the unwinding of speculative length appears to be complete at this juncture, thus lowering selling pressure, but had warned that prices might retest the lows if the FOMC hikes its policy rate by more than the widely expected margin of 25bps. The markets have successfully scaled that wall of worry after the Fed's hike on Wednesday came in-line with expectations. The Fed also indicated that the current rate hike cycle is nearing an end. StanChart expects last week's gamma effects to reverse course with banks buying back positions thus reinforcing the short-term rebound. Beyond that, StanChart says oil prices will largely be dictated by OPEC's and consuming countries' strategic inventory policy shifts. The commodity experts are bullish that the path of least resistance for oil prices at this point is higher, not lower.

Yet oil prices, after a brief rebound, continue to face significant selling pressure, with both WTI and Brent crude down 2.5% on Friday's intraday session. Apparently, banking fears are far from over and this situation could linger for a while. The market appears to be reacting to some other unfolding banking drama whereby shares of Germany's Deutsche Bank have plunged 11% on Friday after its credit default swaps started pushing higher. Credit swaps are used for insuring the bank's debt against the risk of default, and rising rates means the market thinks the risk of DB defaulting is rising. DB's woes have put the European banking sector in reverse gear, taking down with them shares of Barclays, BNP Paribas, UBS and Societe Generale.

"Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk-on," Nordea chief analyst Jan von Gerich has told Reuters.

This comes despite European Central Bank President Christine Lagarde reassuring EU leaders that the euro area banking sector was resilient due to strong liquidity positions, ample capital and post-2008 reforms. She also said the ECB toolkit was ready to provide liquidity to the financial system if the need arises.

The bigger question here is whether the recent spate of bank failures and crises, including the sudden collapse of Silicon Valley Bank and liquidity crisis at banking giant Credit Suisse, can be written off as "idiosyncratic" events or mark the unfolding of another global financial crisis. Right now the markets remain jittery and don't appear to know what to make of the entire saga.

But as UBS Wealth chief investment officer Mark Haefele has said, the swift action by the FDIC to guarantee deposits and by the Fed to lend to banks that require funds will solve liquidity-related risks for U.S. banks and also for the U.S. branches of foreign banks.A week ago, we witnessed another rout for mid-cap regional banks stocks, before reports emerged that big banks would come to their aid. The SPDR® S&P Regional Banking ETF (NYSE:KRE) has crashed more than 25% since the SVB snafu, but appears to have stabilized lately.

That suggests that energy markets could also quickly recover after the dust settles. 

By Alex Kimani for Oilprice.com

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