Big Banks and Oil Loan

    The glut of oil in the world was caused mainly by the increase of resources to the American energy boom which was the result of Wall Street investment banks funding their drilling projects which are quite expensive.

 

    Because of the above the prices of oil have fallen down as low as $ 30 a barrel. This wave of commotion has affected the energy industry leading to many of the oil companies have become insolvent. The others who are still managing to hold on financially are resorting to cut on jobs and spending to keep afloat.

 

    The oil prices are further predicted to fall to $ 20 or even $ 10, if the soothsayers are to be believed, which will again cause turmoil in the Wall Street according to three of America’s biggest banks.

 

    Wells Fargo (WFC) has gone to the extent of reserving $ 1.2 billion to make up the losses with the "continued deterioration within the energy sector." They are having an exposure of more than $ 17 billion in the oil and gas sector.

 

    JPMorgan Chase (JPM) has reserved an extra $ 124 million to offset any possible losses in the oil and gas loans. The current price of oil at the level of $ 30 which is expected to last another 18 months could increase the above to even $ 750 million according to them.

 

    Citigroup (C) views that "oil prices are likely to remain low for a longer period of time."

 

    Its loan loss reserves’ provision in the energy space is $300 million. If oil price remains around $ 30 a barrel its energy loss will be $ 600 million in the first half of 2016. If the same drops to $ 25, then Citi has to face a $ 1.2 billion energy credit loss.

 

    Future of Oil Companies

 

    From the beginning of 2015, 42 North American companies have gone bankrupt due to the oil crisis as per the list of Haynes and Boone, a Houston Law firm. According to the estimates by Standard and Poor, it 50 % of the energy bonds run the risk of getting junk and “distressed”. Risk of default is likely to increase.

 

    Assistance in the form of a bail out for the U S oil industry is mooted to overcome the pain. Such a move is likely to be opposed by the political opposition, however.

 

    The following question was posed by the outspoken banking analyst Mike Mayo to JPMorgan boss Jamie Dimon, "One year from now, are you going to look back and say, 'Whoops, we didn't get ahead of this enough,' during Thursday's conference call. If he was to decide, Dimon opined that he would anticipate greater losses and provide for them which of course had to be limited by accounting rules.

 

    As per Dimon, JPMorgan’s balance sheet has only a small portion of energy portfolio and the loans have physical assets as security. If required the banks can recover the money ,in case of  default, by selling them.

 

    Paul Miller, a banking analyst at FBR, has a different interpretation in that banks had more threat last decade because of mortgage rather than the threat of oil loans now. The banks have accrued and maintaining capital to counter the losses.

 

    In spite of the commotion and disturbance due to oil price falling, JPMorgan is planning to remain in the oil patch and not run away.