Oil is plunging 6%, heading for its worst day since July as the banking crisis wreaks havoc on markets

Oil production in Azerbaijan

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Oil prices fell Wednesday as traders feared a looming banking crisis could hurt global economic growth.

West Texas Intermediate futures fell more than 6% to $66.85 a barrel. That would be WTI’s biggest one-day drop since July 12, 2022, when it fell 7.9%. Brent oil, the international benchmark, fell 5.8% to $72.98 a barrel.

“The oil market will remain in 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 from the Fed triggering a severe recession,” said Ed. Moya, senior market analyst at Oanda. “Now around the mid $60 mark, the plunge of WTI crude is at the mercy of how much worse the macro picture gets.”

A retest of the October lows could lead to more downward pressure on WTI crude, he said, adding that energy stocks could struggle given the weakening demand outlook and the surplus likely to persist for the foreseeable future.

“Longer term, however, we still see you need to have energy in your portfolios as many of the oil giants have robust balance sheets that support continued buybacks and dividends,” he added.

The drop came as global risk markets sold off on news that Credit Suisse’s largest investor, the Saudi National Bank, would no longer provide aid to the embattled bank. The news led to a fall of more than 20% in the bank’s US-listed shares. It also raised concerns about the state of the global banking system less than a week after two US regional banks failed.

The stress at smaller banks led Goldman Sachs to lower its forecast for US GDP growth.

“Small and medium-sized banks play an important role in the U.S. economy,” Goldman economists wrote. “Banks with less than $250 billion in assets account for about 50% of U.S. commercial and industrial loans, 60% of residential loans, 80% of commercial real estate loans, and 45% of US loans. consumers.”

“US policymakers have taken aggressive steps to strengthen the financial system, but concerns about stress in some banks remain,” they added. “Continued pressure could lead smaller banks to become more conservative on lending to preserve liquidity in case they need to meet depositor withdrawals, and tightening lending standards could weigh on aggregate demand.”

The Federal Reserve is holding a policy meeting next week. At the start of this week, traders had priced in a rate hike of at least 25 basis points. However, the CME Group’s FedWatch tool now shows an almost 2 to 1 chance that rates will remain at current levels.

— CNBC’s Christopher Hayes contributed to this report.

Correction: Oil was heading for its worst day since July. An earlier headline misrepresented the time frame.

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