Banking Volatility Spills Over Into Oil Market: What Investors Need To Know

Oil prices dropped on Monday following the collapse of SVB Financial Group SIVB, Signature Bank SBNY and Silvergate Capital Corp SI.

The Oil Move: Investors are dumping U.S. assets over fears surrounding potential contagion in the U.S. banking sector, but recovering demand from China could help support oil prices in coming weeks.

WTI crude oil prices initially dropped 4.7% to around $73 per barrel on Monday morning before recovering to above $75/bbl, and the United States Oil ETF USO dropped 1.1%. If banking sector volatility triggers a U.S. recession, oil demand could fall sharply.

On Friday, Baker Hughes Co BKR reported the U.S. oil and gas rig count dropped last week for the fourth consecutive week, another potential warning sign for demand.

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Energy stocks have been pressured along with much of the rest of the market in the last week.

A Trading Opportunity? Dr. Ilia Bouchouev, former president of Koch Global Partners, tweeted Monday that plummeting crude oil futures have created an excellent opportunity for traders.

"Thinking that after the dust settles #SVB may end up being a bullish factor for #oil, as risk parity and safe haven demand increase #bond holdings, which requires more oil hedges against #inflation," Bouchouev said.

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Natural Gas Jumps: While oil prices tumbled, natural gas prices jumped and the United States Natural Gas Fund, LP UNG gained 7.4% on Monday morning.

A surge in gas prices in Europe appears to have spilled over into the U.S.

Import terminal strikes in France, EDF discovering defects at two of its nuclear reactors and a cold snap across major regions of Europe have contributed to the rise.

Benzinga's Take: Oil prices will likely continue to trade based largely on the outlook for the U.S. economy. If the Federal Reserve can get inflation in check without triggering a severe recession, demand for oil will be preserved and prices will likely stay high.

Photo via Shutterstock.