Banking Trouble Fuels Hedging in Oil

The price of crude futures slumped to their lowest level in two years on concerns that trouble in the banking industry could spark a global recession and curtail fuel demand.

Market players have increased purchases of put options of oil with banks, oil producers and hedge funds, looking to protect themselves from further losses. Crude futures have tumbled over 8% in the last week as the twin collapse of SVB Bank and Signature Bank ignited worries of a broader banking crisis.

Credit Suisse, another embattled firm, on Thursday looked to boost its liquidity by borrowing up to $54 billion from the Swiss central bank, making it the first major global bank to receive emergency monetary assistance since the 2008 financial crisis.

The volume of puts for the US crude futures contract for April delivery grew last week over 30% from the previous session to 30,594. This week, volumes climbed even higher, leaping by more than 60% to 50,255 puts.

There is now widespread investor fear that if the global economy falters, oil prices could continue to fall as market players scramble for safe havens, thereby driving up demand. Analysts expect to see continued volatility because investor sentiment is so tainted. 

Even with the latest splurge on oil, many investors have been reluctant to buy and hold and have focused on short-term positions in the market. Shorting of this nature comes with dangers. If oil prices fall further, buying put options to protect against the downside could become more expensive if demand rises enough.