DTN Oil

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange settled Monday's session with losses between 0.5% and 2.5%, although all petroleum contracts moved off intrasession lows. Futures were backstopped by a sharp retreat in the U.S. dollar index as investors reassessed odds for a recession following the collapse of Silicon Valley Bank. Some in the market bet the financial shock could force the Federal Reserve's hand to pause interest rate increases at their March 21-22 monetary policy meeting, potentially taking some pressure off the financial system.

Emergency measures taken by the Fed, the Federal Deposit Insurance Corp., and the U.S. Treasury Department to shore up confidence in the banking sector had a limited effect in countering a selloff in the shares of regional lenders. San Francisco's First Republic Bank led a decline with a staggering 60% drop, followed by Western Alliance Bancorp that lost 50% in value and PacWest Bancorp with a 32% drop in Monday's session. Even stocks of larger banks like Bank of America and Charles Schwab came under selling pressure, although the magnitude of decline was nowhere near that of the regional lenders.

The selloff was triggered by fears of contagion from Friday's collapse of SVB Financial and Signature Bank's seizure by the regulators. Despite government reassurances that all depositors would have access to "all of their money" starting Monday, investors fled bank shares for the perceived risk of exposure to debt, including U.S. treasuries and mortgage-backed securities that took a beating every time the Federal Open Market Committee increased the federal funds rate.

As interest rates were close to zero, banks profited from the chance to acquire an abundance of bonds and treasury securities. With the subsequent Fed rate hikes implemented to fight inflation, these assets have been losing value. Thus, investors fear that SVB scenario could play out in other regional banks that mismanaged interest rate risk.

Amid this backdrop, markets are rapidly repricing the FOMC's next rate move, now betting on a much shallower peak rate before the central bank implements the first rate cut as early as November. More than 70% of investors expect the Fed to introduce its final rate increase of 25 basis points on March 22, bringing the terminal rate to a 4.75% to 5% targeted range -- a full 1% lower than the market expected just five days ago.

Markets are clearly expecting a so-called "hard landing" for the U.S. economy -- a scenario where a spike in unemployment and subdued growth would take the teeth out of inflation and the Fed's aggressive rate cycle.

For the oil complex, such a scenario would have detrimental effects on fuel demand in the United States that have come under pressure from a weak manufacturing sector. Recent data show U.S. demand for middle distillates, which closely correlates with industrial activity, eroded by a steep 1 million barrels per day (bpd) from the comparable 2022 consumption rate to 3.514 million bpd -- the lowest level since the holiday week of Dec. 29. Distillate fuel demand on a four-week average basis is 15% or 645,000 bpd below the year-ago demand pace at 3.753 million bpd. This continues to speak to what macroeconomic data suggests is an outright recession in U.S. industrial and manufacturing activity.

On Friday, Baker Hughes reported the number of active oil-targeted rigs in the United States declined by two last week to 590 -- the lowest count since June 2022. Since the start of the year, U.S. oil producers deactivated 29 rigs, with the rig count falling each week except for two this year.

At settlement, West Texas Intermediate futures for April delivery declined $1.88 to $74.80 per barrel (bbl), and international crude benchmark Brent contract for May delivery fell to $80.77 per bbl, down $2.01 per bbl. NYMEX RBOB April futures dropped back $0.0544 to $2.5914 per gallon, and ULSD April futures retreated $0.0114 to $2.7615 per gallon.

Liubov Georges can be reached at liubov.georges@dtn.com