Tags: Price | oil | financial | crisis

Oilprice.com: Cratering Oil Prices Could Eventually Cause a Financial Meltdown

By    |   Wednesday, 03 December 2014 02:21 PM

Plummeting oil prices could spark a financial crisis if they stay down at rock-bottom levels for an extended period of time.

That's the conclusion of industry site Oilprice.com's Nick Price, which said the oil and gas renaissance in the U.S. was made possible by cheap credit and low interest rates.

"Not only has financing come from company shareholders and traditional banks, but hundreds of billions of dollars have also come from junk bond investors looking for high returns," wrote Price.

He said junk bonds in the energy sector have hit $210 billion, about 16 percent of the overall global market for the high risk instruments.

"As is the nature of the junk-bond market, lots of money flowed to companies with much riskier drilling prospects than, say, the oil majors."

Bloomberg estimates that bond investors who helped back America's shale boom are facing potential losses of $11.6 billion as oil prices plumb new depths.

"We are concerned that there will be defaults and that was even before oil fell as much as it has," Ivan Rudolph-Shabinsky, an Alliance Bernstein money manager, told Bloomberg. "There was too much money going into this space that would have resulted in problems long term — now that timeline has been accelerated."

However, Price is of the opinion that fears of a cascading-style financial meltdown like 2008 led by a junk bond implosion are probably exaggerated. Low interest rates will likely keep junk bond demand high, and many drillers have hedged themselves as insurance against low prices, he said.

"But a junk bond crisis could become more likely if oil prices stay low for an extended period of time. Once a few companies begin to default, the problem could quickly spread. Another variable is how quickly the U.S. Federal Reserve will raise interest rates, which could significantly affect the attractiveness of the junk bond market."

Reuters reported that a slowdown in shale oil production in the U.S. may already be underway.

Permits for new wells fell 15 percent across 12 major shale formations in October, according to exclusive information provided to Reuters by industry data firm DrillingInfo.

Reuters said a decrease in the rig count is typical two to four months after a decline in permits — and production growth would be expected to slow six months after.

"This is a pull back from the acceleration. People are being careful," said Allen Gilmer, chief executive officer of DrillingInfo.

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Plummeting oil prices could spark a financial crisis if they stay down at rock-bottom levels for an extended period of time.
Price, oil, financial, crisis
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2014-21-03
Wednesday, 03 December 2014 02:21 PM
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