SVB’s failure was due to mismanagement by bank officials. Over 90 percent of its deposits were from startups and VC funds with balances exceeding the FDIC’s $250,000 insurance limit. In the two days before SVB’s closure, it had deposit outflows of $42 billion and $100 billion, crippling the bank’s liquidity. These bank closures kicked off a panic that the US banking system would have more failures. The root cause of the failures was the impact of the Federal Reserve’s higher short-term interest rates used to fight inflation. Higher interest rates drive down the value of bonds, especially those with long maturities. Bonds, loans, and shareholder equity comprise a bank’s capital. The bonds are the most liquid capital available to meet deposit withdrawals, but with a diminished value, selling them erases shareholder equity leading to bankruptcy.
US banking problems spread to European banks active in tech lending and potentially facing deposit withdrawals. Uncertainty about the fate of large international banks spurred a shotgun wedding of the two largest Swiss banks. The banking crisis spurred a tightening of credit standards and a shift away from risk-taking investing. Commodity trading is one of the riskiest venues and much of its capital depends on credit lines. Guess what? Commodity market liquidity suddenly tightened, and a riskaverse mentality gripped trader activity. Traders sold.
Financial speculators sold the equivalent of 142 million barrels in the six most important oil contracts in the week ending March 21, after selling 139 million barrels in the prior week. Total sales for the two weeks were the largest for any similar span since May 2017. Those fund managers slashed their combined position to just 289 million barrels on March 21—the 6th percentile for all weeks since 2013—down from 570 million barrels or the 46th percentile on March 7.
In contrast, oil demand continues to recover. Moreover, figures show the global oil industry is on track to construct the largest refinery capacity increase in 2023–24 since the 1980s. Four million additional barrels of crude oil will be needed to feed those refineries. The future for oil looks brighter than the near term, which should lift prices, just as happened in March’s final week.
NATURAL GAS
Weather continues to define the natural gas market. Winter is in its final days. The “shoulder” demand phase of the annual gas cycle is starting. Those familiar with March’s “in like a lion, out like a lamb” expression may note that lions and lambs arrive and depart at different times in different regions of the country.
During the first four weeks of March, gas storage volumes, while continuing to be drawn down, declined until the middle of the month, before demand ticking up slightly. Up until mid-March, the 2023 weekly declines were smaller when compared to the declines for both 2022 and the 5-year average. In other words, March was experiencing the lamb in early March, but the lion then took over. Going forward, gas demand for heating grows weaker every day. At the same time, gas production remained high. Gas production was up marginally over the prior week in the latest report. More significantly, compared to a year ago, gas production was 4.7 percent greater.
Liquefied natural gas exports are back to levels of year-ago before the Freeport LNG accident shut down the terminal for months. The good news for LNG is the approval of two new export terminals. Sempra will spend $13 billion to construct a new terminal with an export capacity of 13 million tons annually that will start up in 2027. Phase Two of Venture Global’s Plaquemines LNG will start exporting in 2025. Phase One will start in 2024. The two phases will export 20 million tons. As the leading LNG exporting country, these additional terminals will help keep the US in the lead and support gas demand for years.
Weak winter heating demand, no additional LNG export capacity available, and sustained gas production have contributed to low gas prices. Year-over-year gas prices have fallen by 42 percent. The accompanying chart of weekly natural gas prices shows current prices below the long-term average low price that existed from 2015 to now. We plotted a new line showing the absolute low gas prices last seen in 2020 and 2016. Current gas prices are not yet down to that level, but it is possible events could send gas prices lower. For example, if another LNG terminal had an accident and was unable to export, the volumes of gas supplying that terminal would need to find a customer, likely at a lower price.
Stay tuned. Gas price volatility will continue until summer temperatures drive air conditioning use supplied by electricity generated from natural gas.
This story was originally featured in ON&T Magazine’s April 2023 issue. Click here to read more.
