Just last week on Thanksgiving Day, oil prices plunged below $70 – taking down many economies with it.
And our beloved shale is no exception. In the United States, permits for new wells have dropped by 15% in October (a sure sign of a slowdown for shale oil).
But there’s more. After being slammed on Friday (following OPEC’s decision to maintain current production levels), the shale industry has been suffering even more. Share prices for banks that are lending to the industry keep falling, too.
BOK Financial (BOKF), for one, is down by nearly 10% over the last two sessions. This is no surprise as it has the biggest percentage of energy exposure among the banks that RBC Capital, one of the largest investment banks, covers.
Cullen/Frost Bankers (CFR), another large investor, is also off, down more than 7%.
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“Energy lenders believe that the majority of their clients are well-hedged through 2016… However, the likelihood of a slowdown in activity (think drilling/servicing) is very possible if prices remain depressed and/or move lower,” RBC analyst Jon Arfstrom advises.
Can’t Hide the Junk
What we’re seeing is a domino effect. You see, U.S. corporate junk bond funds are getting hit, too – thanks to sliding oil prices. Energy companies issued junk bonds to fund shale production. But now, investors are concerned – thinking they won’t be able to repay their debt.
This oil price drop is taking no prisoners.
After bouncing back on Monday, crude oil is falling in early trading; since June, it’s taken a 36% dip. But there’s an upside, according to the International Monetary Fund (IMF), falling oil prices are a positive for the global economy.
Coupled with the IMF’s statement, Barron’s claims the panic is near an end. Oil is oversold, and it may be time to buy.
We’ll see about that…
And “the chase” continues,
Commodities Research Team