Monday Morning Update

SVB

After a tumultuous 100 hours for Silicon Valley Bank and the global banking sector more generally, this weekend US regulators stated that depositors will be able to withdraw funds from the bank following emergency funding measures. Following the bank’s collapse on Friday, the following day the Federal Reserve announced that they would establish a new lending facility for SVB and other troubled lenders that would ensure access to deposits held and come at no cost to the US taxpayer. The swift action by the US has eased concerns over any contagion. It’s been announced this morning that the UK arm of SVB is to be acquired by HSBC for one pound, in what will be an absolute steal for the global banking giant. The deal also means that no taxpayer funds will be required to support any bailout. The long story short on how the bank got into this trouble was simply that it invested its deposit base into long term bonds with low, stable yields, but then when interest rates rose these bonds were left heavily out of the money (the portfolio had an average yield of 1.65% compared to current ten-year rates just below 5%). This means that when they needed to redeem the bonds to satisfy client withdrawals they were crystalising a loss, which was previously unrealised all the while the bonds were sat on the balance sheet.

Oil in Focus

As investors upwardly revised their rate hike expectations from the Fed last week, the prospect of suppressed demand due to easing growth saw pressure on oil. This comes as markets also digested OPEC’s Secretary-General Haitham Al-Ghais warning over the potential for suppressed demand from Europe and the US. Yesterday’s move indicates that WTI crude futures have fallen a little over 2.7% on the month, and 21.7% on the year, having spiked at around $120dpb last March. This morning however, WTI crude futures are up around 0.4% as investors digest a potentially more dovish course from the Fed following the SVB fall out.

More generally, according to the International Energy Agency, global oil demand could rise by 2m bpd to reach a record level of just shy of 101.7m bpd. According to the IEA, half of the expected rise in demand will be driven by China’s reopening. Over the course of last year, Chinese oil demand dropped on average by 390,000 bpd, which also represented the first annual decline since 1990.

Away from the demand side, the IEA also highlighted potential oil supply side constraint. The group stated that: “World oil supply growth in 2023 is set to slow to 1 mb/d following last year’s OPEC+ led growth of 4.7 mb/d. An overall non-OPEC+ rise of 1.9 mb/d will be tempered by an OPEC+ drop of 870 kb/d due to expected declines in Russia. The US ranks as the world’s leading source of supply growth and, along with Canada, Brazil and Guyana, hits an annual production record for a second straight year.”

The IEA also stated that growth in energy efficiencies and the rise in sales of electric vehicles could lead to a demand-side shortfall of 900,000 bpd.

EU Carbon Permit Price in Focus

On Friday, EU Carbon Permits closed just down from record highs. This comes as the prospect of a rise in industrial activity has sent prices rising, given the forecasted increase in demand for permits. An easing of energy insecurity fears has brought about a sustained fall in energy prices which have in turn seen carbon permits trade higher as expectations of higher energy usage rise.

The latest rally follows February’s rise which saw permits breach €100 per tonne for the first time in history. According to the FT, “The threshold has been seen as psychologically important, and a price at which companies may start looking more seriously at investing in expensive emerging technologies such as carbon capture and storage.”

It is thought that the carbon credit system helped reduce emissions in the EU by roughly 4% by 2020, with much of this reduction being driven by firms shifting from fossil fuel usage to renewables. Hence, as permit prices rise, it is hoped that firms will decarbonise. Following yesterday’s rally, all eyes will be on energy prices and economic outlook figures to see whether this recent surge will continue.