As oil prices wallow near multi-year lows, it’s becoming increasingly clear that the new cartel controlling oil prices is not OPEC but world credit markets. From Saudi Arabia’s record $100 billion deficit to shale oil’s continuing reliance on cheap credit funding, it’s clear that no major oil producer or company in the world right now is economically self-sufficient based on oil revenues alone. This situation has left the flow of oil and the decision on when to stop pumping the increasingly tarnished black gold in the hands of banks rather than oil men.
The idea that bank loans to oil companies may be in trouble is not new but there are increasing signs of late that these distress energy loans could end up defaulting and leaving banks with a mess to deal with. At the national level, countries like Saudi Arabia won’t forfeit their assets to creditors of course, but their ability to keep running deficit funding is going to increasingly depend on bond market appetite for energy related debt. That could be problematic in 2016. With the Federal Reserve starting to raise interest rates, bond investors may find that they don’t need to invest in energy debt to garner yield as they have in 2015, and this in turn could start to crimp oil production.
Economists often like to cite cartels as having the power to control production, but at this point it looks like the only group with any ability to actually curtail (or expand) production are the major banks that direct capital market flows. Of course that production power is indirect, but it is real nonetheless.
Banks are not required to disclose the loans they hold to investors and Federal regulators don’t disclose this data either as it would potentially risk a run on certain banks, but regulators are definitely taking note of energy related loans in bank portfolios.
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