An excellent post, Red Baron. The piece below by Rob Gottliebsen (referencing Wells Fargo) is must reading as it really highlights the plight of the US oil industry and how it may impact on the Fed's rate rise plan. The oil industry situation globally is akin to our veterans sailing a 12 ft yacht through a massive storm & 60ft waves in the middle of the Atlantic, which is expected to continue for some time. Surviving the storm is the sole focus, nothing else.
Oil slump could thwart Fed’s rates plan
THE AUSTRALIANDECEMBER 15, 2015 9:29AM
Robert Gottliebsen
Business Spectator columnist
Melbourne
The events unfolding in the US reduce the likelihood of major American interest rate increases in 2016.
In turn, US interest rate restraint may cap the rise in the US dollar that has been forecast on the back of higher American interest rates.
Last night Wells Fargo, one of the largest lenders to the troubled US oil and gas industry, warned in an FT interview that the slump in oil prices “feels deeper and broader and could last longer”. That’s “bank speak” for an increase in bank loan loss provisions. Wells Fargo has been expanding its total banking portfolio rapidly and oil exposure now represents only about 2 per cent of its lending portfolio. But the secondary flow-on from the oil slump will also be severe because there are tough times ahead in oil states like Texas, one of Well Fargo’s strongest areas.
Wells Fargo is America’s fourth largest bank by assets and largest by market capitalisation. The decision by the head of its corporate banking, Kyle Hranicky, to highlight the plight of the oil and gas sector just as the Federal Reserve was meeting to raise interest rates is unlikely to be a coincidence.
Hranicky rose through the Wells Fargo bank via oil and gas lending and a feel for the industry. He says that the bank has been in discussions with energy industry clients for several months about preserving cash and cutting borrowing limits.
Some oil and gas companies have the liquidity to survive the cycle, “but others will be under significant stress and may be forced to sell assets or recapitalise”.
What Wells Fargo did not say was that in the current environment, selling assets and recapitalising is very difficult and means companies will collapse. The Wells Fargo statement will not stop the interest rate increase scheduled for Wednesday afternoon US time but it may moderate those in the US Federal Reserve seeking a steady flow of rate increases in 2016.
And it’s only just being realised in the US that the Saudis are planning to keep pumping oil until US production has been substantially reduced. Last night there was some relief as oil and commodity prices steadied. But the better times for carbon energy require substantial cuts in US production and then agreement between Russia, Saudi, Iran and Iraq.
Most of 2016 is likely to be tough. To date, the slump in the US oil industry has been hitting service companies and high-risk lenders but Wells Fargo’s statement indicates the banks are now being affected.
There are many who believe that “normal” interest rates are set to be much lower than was the case prior to the global financial crisis. In previous decades, some nine years of token or low interest rates would have exploded economies like the US. But while there has been a recovery, it has been restrained. If the US interest rate rises are less than expected, the flow on to the value of bonds and in less developed countries will be much less.
It will increase the pressure on the Reserve Bank to lower rates, although rate reductions are unlikely to come onto the Reserve Bank radar while employment continues to increase.
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