Will Cheap Oil Sink The Capital Markets?

How quickly things change…as 2015 waned, fate seemed to smile on ‘The Financials.’ Six years of T.A.R.P., bail outs, QE 1-3, ‘Zero Interest Rate Policy’ (ZIRP) et al… had pumped a surging river of resuscitation through America’s Banking system. With 2016, the prospect of rising rates promised a new tide of revenue as depositors would surely return to traditional instruments, home from the wayward search for ‘yield.’

Then the price of oil fell off a cliff.

As new fossil fuel technologies have hurtled America toward energy independence, banking titans like Goldman Sachs, Wells Fargo, JP Morgan Chase and others have extended much of the ‘junk bond’ debt start-ups needed to get rolling.

The above institutions as well as Morgan Stanley, Bank of America and Citi all have between 2 and 5% of their total loans extended on Energy Sector ventures. This equates to tens of billions of dollars for each.

As oil prices have collapsed, defaults have mounted and each of the above lenders faces between $600 and $900 million in losses this year. Should oil drop below $25, those figures will worsen considerably.

Will this hamper commercial real estate capital? It could if you’re looking for a construction loan on a ‘Class A’ office tower.

These aren’t the guys financing strip centers in Chatsworth.

Those lenders have their own set of challenges in 2016.

But that’s the next blog.