Low Oil Price: The end of the fracking boom

The decline in oil prices slows down the production in the US shale regions. That affects financial markets and banks. Threatens a new crisis?

The chain reactions on Wall Street have begun. Who financed with junk bonds and cheap credit surge in American fracking industry was stopped by a dramatic fall in oil prices. Only the courses of electrons emitted from oil and gas conveyors, high-yield and high-risk bonds plummeted around which the frustrated by low-interest rates, investors still had torn a few years ago. And now feel even American banks that heavily indebted oil producers may not be able to repay their loans.

Many banks that submit their results for the fourth quarter these days, already reported rising defaults on corporate loans for the energy industry. The situation is expected to worsen further. Starting with the market leader JP Morgan to the regional bank BOK Financial in the oil-rich state of Oklahoma increased their bank’s provisions for impaired loans. “It starts to expand,” said William Demchak, CEO of regional bank PNC Financial in Pittsburgh. Credit problems due to low energy prices concern “anyone who played at the beginning of the oil boom” have. The uncertainty is also reflected in the stock market. Share prices of US banks since the beginning of the year as measured by the KBW Bank Index Nasdaq fell by about 13 percent – significantly more than the overall market. The broader S & P 500 was last with 8 percent in the red.

Declining demand from major importers

Especially came under pressure regional banks with large portfolios of energy loans. BOK Financial, the holding company for Bank of Oklahoma and the Bank of Texas, missed their quarterly forecasts because its provision for bad loans due to a – had to increase the debtor from the energy sector – unnamed. Shares of BOK Financial plunged this year from as early as 20 percent. The price of oil of American WTI is also fallen this year alone by about a fifth to last less than 30 dollars per barrel. This is partly due to concerns about weakening demand from large importers such as China. But it is also a result of increased in recent years, American production by fracking, the relatively costly breakup shale rock layers for production of oil and natural gas.

Many bank loans were granted at a time when oil, put the producer as collateral for the loans was $ 80 more per barrel. Although oil companies hedge prices usually depend on the derivatives market. Running the contracts and should oil prices remain at their current low levels or even fall further, banks could be forced to increase their provisions for shaky loans on. “Um 50 dollars per barrel, the mood is a little irritated,” observed banking analyst Christopher Mutascio by that investment firm Keefe, Bruyette & Woods.

The Banking Supervision OCC, which did not make the best figure like most supervisors before the last financial crisis, wants to prevent more, this time. According to media reports, there were last between banks and supervisors controversy over the risk assessment of loans that are secured by oil reserves. Representatives from banks, which must hold a correspondingly larger capital buffer for higher risk, tried to downplay the warning but by the guard’s risks. The supervisor did not accept the protests. Reflecting the decline in oil prices and the potential of a long-drawn period of low or fluctuating prices, the OCC will focus on “the processes of banks to assess, monitor, and manage both direct and indirect exposure to the oil and gas industry,” it said in a report on the risks of lending.

15 percent of loans in the fire in the energy sector

At first glance, the direct involvement of the major banks in the energy sector but seems to be manageable – the banks and some analysts, in any case, indicate confidence. The chief executive of the bank Wells Fargo, John Stumpf, said that the share of loans to the oil and gas industry affects only 2 percent of the overall portfolio. Among the four largest US banks JP Morgan is most engaged with a share of last almost 6 percent. For some smaller banks, such as the Texas Cullen / Frost Bankers, are about 15 percent of loans in the fire of the energy industry.