IEEJ：March ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (628)March 15, 2023

Oil Prices Down on U.S. Banking Crisis with Brent below $80/bbl for the 1st Timein 2 Months
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil prices have rapidly fallen since last weekend. On March 14, the front-monthfutures contract for Brent crude plunged by $3.32 per barrel from the previous day to $77.5/bbl on aclosing price basis, slipping below $80/bbl for the first time in two months, since January 9. The key
West Texas Intermediate futures price also dropped $3.47/bbl to $71.33/bbl, the lowest since lastDecember 9, nearing the psychologically important barrier of $70/bbl.
The oil price plunge came on a U.S. banking crisis triggered by a major U.S. bank failurethat dominated economic news headlines in the world over the past several days. On March 10, U.S.
financial authorities announced that California-based Silicon Valley Bank had become insolvent andcollapsed. The bank, known for aggressive investment in information technology startups, was the16th largest bank, with assets totaling $209 billion as of the end of 2022. The collapse marked thesecond-largest U.S. bank failure in history, following the bankruptcy of Washington Mutual Bank with$307 billion in assets in September 2008. On March 12, U.S. financial authorities announced that New
York-based Signature Bank had failed. The bank had dealt mainly with crypto asset companies andwas the 29th largest U.S. bank, with assets totaling $110 billion. The successive major bank failures
shook financial markets.
Factors behind the major U.S. bank failures include the adverse effects of U.S. interest rate
hikes. Silicon Valley Bank invested heavily in U.S. Treasury bonds and saw massive unrealized losses
on bond holdings due to substantial bond price falls caused by rapid interest rate hikes since 2022.
Monetary tightening through interest rate hikes also hit startups and prompted them to withdraw
deposits from the bank. Insecurity about the bank’s financial profile and creditworthiness spread fastand led the bank’s stock price to nosedive, resulting in the failure. As for Signature Bank, interest rate
hikes for monetary tightening affected crypto asset companies as its clients amid financial insecurity
caused by the Silicon Valley Bank failure, leading to a rapid increase in deposit withdrawals and adecline in liquidity, a vicious cycle that ultimately forced the bank to collapse.
The successive major bank failures have seriously affected financial markets. The Dow
Jones average on the New York stock exchange fell below 32,000 on March 10 and dropped to 31,819
on March 13. On currency markets, the dollar fell below 133 yen temporarily on March 13. As riskoff moves grew, prices soared for gold, which is seen as safe haven asset. The gold futures price rose
to $1,916.50 per ounce on March 13. In such financial market situation, crude oil prices plunged amid
risk-off moves and the loosening supply-demand balance.
U.S. authorities quicky reacted to the financial market turmoil and insecurity. The
Department of Treasury, the Federal Reserve Board and the Federal Deposit Insurance Corporation
published a joint statement on March 12, vowing to protect all depositors. President Joe Biden told a1

IEEJ：March ©IEEJ 2023
press conference on March 13 that the banking system was safe and that people should be secure. Suchactions have led to restored stability in financial markets.
Following the major bank failures and the market turmoil, the next focus of attention is what
to do with interest rate hikes as one of factors behind the turmoil. As noted in my previous special
bulletin (627), the next meeting of the Federal Open Market Committee is attracting attention after
Federal Reserve Chairman Jerome Powell’s remarks on interest rate hikes induced a stock market
plunge. Market players may be interested in how the bank failures would influence the next FOMC
meeting. The bank failures might have made it more difficult for U.S. monetary authorities to steer
monetary policy.
U.S. monetary tightening and subsequent economic deceleration are expected to cause adecline in oil demand, which would loosen the supply-demand balance. The risk-off trend is inducing
crude oil futures selling. U.S. financial market trends thus now exert downside pressure on crude oilprices. We will have to pay attention to how the FOMC would handle monetary policy at its next
meeting and whether the insecurity triggered by the bank failures would calm down in a manner tolead U.S. financial markets to restore stability.
As noted in my previous special bulletin, Chinese economic trends are likely to support orpush up crude oil prices. On March 15, the National Statistics Bureau of China announced major
economic data for January and February. Retail sales that indicate consumption trends scored a yearto-year rise of 3.5% in the two months after declining for three consecutive months. Industrial
production in the two months increased by 2.4% year on year, indicating a recovery. These economic
data improvements are believed to have resulted from the termination of the zero-COVID policy latelast year. However, the Chinese economic picture is still patchy. Real estate investment in the twomonths decreased by 5.7% year on year, indicating that the real estate sector is still sluggish. U.S.
economic deceleration may affect Chinese exports. Overall, however, market players are feeling that
the Chinese economy is indicating signs of a recovery. Their interest in the Chinese economic recovery
will grow further in the future.
As the WTI price falls close to $70/bbl, a response from the OPEC-plus group of oilproducing countries will attract attention from oil market players. The current OPEC-plus oil
production policy calls for cutting production between November 2022 and December 2023 by 2
million barrels per day from October 2022, as decided at the group’s ministerial meeting last December.
The next ministerial meeting is scheduled for June 4, 2023. However, the OPEC-plus group alsodecided to take any action as necessary, indicating that the group could promptly respond to major
crude oil price fluctuations.
If the WTI price slips below $70/bbl, with a downtrend expected to continue, however, theOPEC-plus group is unlikely to leave such downtrend untouched, as indicated by its past actions. The
group may be alert to current U.S. financial market, economic and oil demand trends. While market
players dominantly expect the oil supply-demand balance to tighten towards the second half of thisyear due to a demand increase mainly in China, the balance has the potential to loosen in the first half.
The market may move in a manner to test the OPEC-plus group over its oil production policy.
If the OPEC-plus group takes actions to prevent oil prices from falling or boost them at atime when the U.S. economy is decelerating, tensions may arise between the United States and thegroup led by Saudi Arabia. As far as crude oil prices remain in a narrow range, the equilibrium ofrelations among major oil market actors will continue. If crude oil prices rise or decline sharply or any
2

IEEJ：March ©IEEJ 2023
policy actions cause a sharp crude oil price change, however, the equilibrium may collapse in a mannerto heighten tensions. We will have to closely watch future oil market moves and relevant geopoliticaldevelopments.
Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html

3