Oil prices fall in the wake of SVB collapse

The sudden collapse of the American based Silicon Valley bank (SVB) this week triggered a broad selloff on in the energy sector as worries of an economic slowdown could reduce demand for crude oil. 

SVB Financial Group (commonly known as SVB) is a publicly traded financial services company that specializes in financial services to the innovation economy, providing financing, banking, and investment services to technology, life science, healthcare, and venture capital industries. As of 2021, SVB had a market capitalization of over $50 billion. So, what caused the collapse that started the most significant financial crisis since 2008, and why has this an impact on oil prices?

Three factors As for why SVB, the $212bn tech-lender suddenly collapsed has no one quick simple answer. Some argue, it was due to the Trump-era regulation rollbacks, some say risk mismanagement at the bank, and others sharp interest rate rises after a decade of ultra-low borrowing costs. But most likely it was due to a combination of all three factors.

Trump-era changes to Dodd-Frank
Dodd-Frank was a comprehensive piece of legislation that was enacted by the U.S. Congress in 2010 in response to the 2008 financial crisis, with the aim to improve financial stability, increase transparency and accountability in the financial system, and protect consumers from abusive financial practices. 

Dodd-Frank required that banks with at least $50bn in assets – banks considered “systemically important” – undergo an annual Federal Reserve “stress test” and maintain certain levels of capital. 

SVB’s chief executive, Greg Becker, argued before Congress in 2015 that the $50bn threshold (SVB held $40bn at the time) was unnecessary and his bank, like other “mid-sized” or regional banks, “does not present systemic risks”. 

In 2018 former president Donald Trump, with support by Congress signed a new bill that undid some of the capital requirements imposed under the Dodd-Frank act. At that time Trump said the new bill went a “long way toward fixing” Dodd-Frank, which he called a “job-killer”. 

The non-partisan Congressional Budget Office (CBO) warned before the bill passed that raising the threshold would “increase the likelihood that a large financial firm with assets of between $100bn and $250bn would fail.” 

And late last week the Vermont senator Bernie Sanders took to Twitter and argued that the culprit of the SVB collapse was the “absurd” law Trump signed in 2018. 

SVB’s Mismanagement?
According to reports that are now being investigated by the Federal Reserve, SVB did not have a chief risk officer (CRO) for some of 2022. 

SVB’s previous CRO, Laura Izurieta, quit her job at the bank in October 2021 but stopped performing the role in April 2022, and it wasn’t until December that the bank managed to fill that crucial vacant role. 

The bank went seven months without a CRO even though the board’s risk committee was meeting frequently before the bank collapsed. 

– It means perhaps management was hiding something or didn’t want to disclose something, or had disagreements over the risks it was taking, said Reed Kathrein, a lawyer specializing in shareholder lawsuits, to Bloomberg. 

SVB’s ESG, environmental, social and corporate governance-driven investing has also come under scrutiny in the wake of the collapse with the bank being accused of prioritizing social justice over financial management. 

The Republican House oversight committee chairman, James Comer, called SVB “one of the most woke banks”.

Inflation and interest rates 

As most banks since the financial crisis of 2008, SVB had benefited from more than a decade of “ZIRP” money as billions poured into the bank via tech venture capital. 

A large part of that money was invested in long-term US treasury bonds and when interest rates started sharply rising last year, and depositors demanded higher returns, the bank was forced to sell some of those bonds at a loss. 

When news of this hit social media, tech investors panicked, triggering a classic bank run. From there, it took 36 hours for the second-biggest bank failure in US history to materialize. Before the collapses, investors had been expecting the Federal Reserve to raise interest rates by a quarter or half a percentage point when the governors meet next week.

Why oil prices fell 

Oil prices fell sharply this week, as traders fears of a brewing banking crisis could slow down global economic growth. 

West Texas Intermediate futures fell more than 5%, reaching its lowest level since December 2021. Brent crude, the international benchmark, slid 4%. Oil prices tend to fall during an economic downturn for several reasons, such as reduced demand, oversupply, speculation and currency fluctuations.

During an economic downturn, businesses and consumers tend to cut back on spending, which leads to a reduction in demand for oil and other commodities. With less demand, oil prices tend to fall. In addition to reduced demand, an economic downturn can also lead to an oversupply of oil. 

This is because during a downturn, companies may continue to produce oil at the same rate, even as demand drops. This can lead to a surplus of oil, which in turn puts downward pressure on prices. 

– The oil market is going to be stuck in a surplus for most of the first half of the year, but that should change as long as we don’t see a major policy mistake by the Fed that triggers a severe recession, said Ed Moya, senior market analyst at Oanda to CNBC. 

Even for the price fall of late, the long-term view is still that energy commodities should have a place in portofolios. 

– Longer-term views however still support having energy in your portfolios as a lot of the oil giants have robust balance sheets that support continued buybacks and dividends, Moya added. 

Speculators can also play a role in driving up or down the price of oil. During an economic downturn, speculators may be more likely to bet against oil prices, causing them to fall. And since oil is traded in US dollars, changes in the value of the dollar can impact the price of oil. During an economic downturn, investors tend flock to the US dollar, causing it to appreciate in value and leading to a fall in oil prices.