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Breaking News:

OPEC Lifts Production in February

Oil Prices Crash As Demand Fears Mount

Oil prices crashed in Wednesday’s session, marking the second day of declines ahead of a likely 25-basis point rate hike by the Federal Reserve as well as growing anxiety over the prospect of a recession amid questions about the health of U.S regional banks. WTI June contract slipped 5.1% to $68.29 per barrel while Brent for June settlement was 4.7% lower to $71.80, the lowest level in more than a year.

The current crash closely mirrors the March decline when the banking crisis first unfolded, suggesting the markets are getting concerned about the demand outlook. The financial markets are reeling after the collapse of First Republic Bank, the second-largest U.S. bank to fold after Washington Mutual failed in 2008. The Federal Deposit Insurance Corp. struck an agreement for JPMorgan Chase & Co. on Monday to take over the bank’s assets including $173 billion of loans and $30 billion of securities, as well as $92 billion in customer deposits.

JPMorgan has tried to reassure investors that there is little chance of this morphing into a full-blown banking crisis. But the markets are becoming increasingly jittery after similar promises were made after the sudden collapse of Silicon Valley Bank and the liquidity crisis at banking giant Credit Suisse in March.

The timing of these events could not have come at a worse time for oil markets weighed down by other concerns. Growing fears of a recession due to rising interest rates as well as the risk that Chinese demand could fall short of expectations in the coming months remain a serious overhang on oil prices.

There are also fears that Russian output might not have fallen despite government announcements. There are reports that Russian crude shipments remain strong despite sanctions and embargoes: Reuters reported April oil loadings from Russia's western ports are on track to reach their highest since 2019 at more than 2.4M bbl/day. Previously, Russia's Deputy Prime Minister Alexander Novak announced that Russia would cut production by 500,000 bpd in March, and again in early April promised to extend the cuts until the end of the year.

By Alex Kimani for Oilprice.com

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  • Mamdouh Salameh on May 03 2023 said:
    The decline in oil prices isn’t due to weak global oil demand. The blame should be laid fairly and squarely at the door of the lax US banking system.

    This is a purely American affair involving a collapse of three American commercial banks raising fears that this could develop into a global banking or financial crisis. This situation won’t be helped by a likely 25-basis point rate hike by the US Federal Reserve and by worries about the state of the US economy.

    Even the hugely bullish impact of China’s economy projected to grow this year at 5.2%-6.5% according to the IMF could find it difficult to help the global economy when there is a threat of a banking or financial crisis reminiscent of the 2008 subprime financial crisis.

    Only when fears of a global banking crisis subside will we see a rebound of oil prices.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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