Oil Wobbles After Selloff Ahead of ECB Rate Announcement

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude traded on the Intercontinental Exchange flipped between modest gains and losses early Thursday after Credit Suisse announced it would receive a $54 billion loan against its collateral from the Swiss National Bank to shore up liquidity and confidence in the troubled bank. This has lifted sentiment ahead of the highly anticipated rate decision from the European Central Bank with investors paring bets on another half-point rate hike amidst the banking turmoil.

Shares of Credit Suisse jumped over 30% at the market's open Thursday after the bank said it would borrow up to $54 billion from the Swiss National Bank. In a joint statement released Thursday morning, the Swiss National Bank and the Swiss Market Supervisory Authority said Credit Suisse "meets the capital and liquidity requirements imposed on systemically important banks."

The funding deal calmed markets for the time being, with European equities recouping some of Wednesday's steep losses and equity futures on Wall Street trading mixed as the U.S. dollar retreated. At last look, the U.S. dollar weakened 0.10% against the basket of foreign currencies to 104.175 after a blow-out rally tied to investors fleeing riskier assets for the safety of the U.S. currency. Next, investors will turn their attention to the European Central Bank, which is expected to announce its rate decision at 9:15 a.m. EDT. Markets are now pricing in a 60% chance of a 25-basis-point hike in Euro Zone rates compared to a 90% chance of a 50-basis-point hike just a day earlier. Some former ECB officials, including ex-governor Vitor Constancio and former executive board member Lorenzo Bini Smaghi, advised in favor of a quarter-point increase at most.

ECB policymakers are also set to release fresh quarterly economic forecasts for the Euro Zone that could show headline inflation receding faster than previously seen -- even as underlying price gains, known as core inflation, prove stickier.

The turmoil at one of Europe's largest banks follows the collapse of two regional banks in the United States -- Silicon Valley Bank and Signature Bank -- both casualties of poor hedging in the face of eight interest rate hikes by the Federal Reserve in the last 12 months. 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 the SVB and Credit Suisse scenario could play out in other banks that mismanaged interest rate risk.

Against this backdrop, rating agency Moody's this week downgraded its outlook for the U.S. banking system, citing the rapid deterioration of the conditions facing the sector.

"Pandemic-related fiscal stimulus along with more than a decade of ultralow interest rates and quantitative easing resulted in significant excess deposit creation in the U.S. banking sector," Moody's strategists said. "This has given rise to asset-liability management challenges, with some banks having invested excess deposits in longer-dated fixed-income securities that have lost value during the rapid rise in U.S. interest rates."

Near 7:30 a.m. EDT, West Texas Intermediate contract for April delivery softened $0.31 to $67.30 barrel (bbl), and the international crude benchmark Brent contract for May delivery slipped to $73.48 bbl. NYMEX RBOB April futures softened $0.0066 to $2.4318 gallon, and ULSD April futures retreated $0.0510 to $2.5526 gallon.

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

Liubov Georges