Big banks are cringing as crude oil is crumbling.
Now that the oil glut has caused prices to crash below $30 a barrel, turmoil is rippling through the energy industry and souring many of those loans. Dozens of oil companies have gone bankrupt and the ones that haven’t are feeling enough financial stress to slash spending and cut tens of thousands of jobs.
For instance, Wells Fargo () is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.”
JPMorgan Chase() is setting aside an extra $124 million to cover potential losses in its oil and gas loans. It warned that figure could rise to $750 million if oil prices unexpectedly stay at their current $30 level for the next 18 months.
Citigroup() built up loan loss reserves in the energy space by $300 million. The bank said the move reflects its view that “oil prices are likely to remain low for a longer period of time.”
More oil companies will die
The oil crash has already caused 42 North American oil companies to file for bankruptcy since the beginning of 2015, according to a list compiled by Houston law firm Haynes and Boone. It’s only likely to get worse. Standard & Poor’s estimates that 50% of energy junk bonds are “distressed,” meaning they are at risk of default.
The financial pain has gotten so great that now there’s murmurs of a bail out for the U.S. oil industry, though it’s clear any assistance would run into political opposition.
Are banks ready?
All of this raises the question: Is Wall Street doing enough to prepare for the oil storm?
“One year from now, are you going to look back and say, ‘Whoops, we didn’t get ahead of this enough,'” outspoken banking analyst Mike Mayo asked JPMorgan boss Jamie Dimon during Thursday’s conference call.
Full article: Big banks brace for oil loans to implode (CNN Money)