Oil prices drop in wake of SVB crisis: What does it mean for investors?

SIGNAL HILL, CALIFORNIA - FEBRUARY 09: An oil price pumpjack stands idle near homes as people walk with dogs on February 09, 2023 in Signal Hill, California. California law S.B. 1137, which required a safety buffer zone of 3,200 feet around homes and schools for new oil and gas drilling, was suspended after the petroleum industry collected enough signatures in a petition campaign to place a referendum on the 2024 general election ballot. The bill was originally signed into law by Governor Gavin Newsom last year and also banned new drilling near parks, health care facilities, prisons and businesses open to the public. (Photo by Mario Tama/Getty Images)
Analysts shrugged off lower oil price concerns for shareholders as demand for crude remains strong. Photo: Mario Tama/Getty

Oil prices extended losses on Tuesday after the Silicon Valley Bank (SVB) fallout continued to weigh on the minds of investors.

Brent crude futures (BZ=F) fell $1.64, or 2%, in early trade, to $79.13 a barrel, while US West Texas Intermediate (CL=F) dropped $1.74, or 2.3%, to $73.06 a barrel.

On Monday, the two benchmarks slipped to their lowest price levels since early January and December, respectively.

However, analysts said shareholders of oil majors shouldn't be too concerned due to a strong demand outlook.

Giles Coghlan, chief market analyst, consulting for HYCM, said the price dip was a fear reaction as traders speculated how much deeper the Silicon Valley Bank crisis might go.

"However, oil had a strong bounce from $73 and that reflects two things. Firstly, lower US rates will be a medium-term positive for oil as easier conditions return; and secondly, there’s optimism about oil demand for the second half of the year and a China bounce-back post COVID," Coghlan said.

"Additionally, the International Energy Agency (IEA) report last month saw oil demand rising by 2 million barrels per day (bpd) in 2023 which was +200,000 bpd from the prior reading…that will further enhance the upside outlook for oil."

As a result, a medium-term bull case remains for oil and the dip could also be an opportunity for buyers, according to Coghlan.

Price impact on shareholders

Ajay Parmer, associate director of global oil markets at HSBC (HSBA.L), said that although oil prices were down due to the SVB collapse, the oil market was still reasonably balanced — buffeted by macroeconomic factors in recent weeks, which he expected to continue in the near-term.

Falling oil prices will lead to a fall in the equity prices of oil majors, he said.

"Oil and gas stocks were amongst the worst performing sectors in Monday’s cross-market price falls. Nevertheless, we think this risk-off sentiment will be temporary and so this should have limited impact on shareholders at the oil majors."

In afternoon trade in London on Tuesday, that "risk-off" sentiment eased as shares were back up for Shell (SHEL.L) and BP (BP.L).

Shell’s share price rose 1.68% to £2,479 and BP stock up 1.93% to £532.61.

Oil demand growth in 2023

The latest data from The Organization of the Petroleum Exporting Countries (OPEC) confirmed that world oil demand in 2023 will rise by 2.32 million bpd, or 2.3%.

As expected, OPEC raised its forecast for Chinese crude demand growth this year, due to the relaxation of the country's COVID-19 restrictions.

Both Brent and WTI prices remained around $79 and $73, respectively, following the OPEC announcement.

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