Oil prices keep on falling. On Monday (Dec. 14), US benchmark West Texas Intermediate crude briefly touched a new 2015 low, falling below $34 a barrel, and international benchmark Brent crossed $37 a barrel, a hair above its financial crisis-era low.
As the oil crash keeps going with no clear end in sight, the commodity’s morass is spreading to other parts of the financial universe. Of late, the sector getting the most attention is high-yield (junk) bonds. Oil drillers and other energy firms took out tons of debt to go after all the crude discovered in the Bakken region in North Dakota. And despite their poor credit ratings, defaults were minimal because low rates made it pretty easy for borrowers to roll over their debt.
But as interest rates prepare to begin their (gradual) rise this week and low oil prices eat into profitability, it’s harder to refinance. The spread between yields of Treasury debt and the lowest rated bonds has blown out to levels not seen in years.
That, in turn, is hitting bondholders. For example, hedge fund Third Avenue closed one of its credit funds Friday, and it’s refusing to issue redemptions (paywall) to investors until those trades are unwound, many of which were energy plays. Additionally, Wells Fargo has reportedly been meeting with clients in the energy industry (paywall) in a bid to shore up their balance sheets and limit exposure.
In some cases, the impact of cheap oil rises to national proportions. Major oil exporters such as Canada, Russia, and Norway have all seen their currencies lose strength against the US dollar.
In Canada, the oil slump was one of the chief reasons for a recession it experienced earlier this year, and, in the Alberta region, unemployment is skyrocketing. Russia has been dealing with sanctions because of its conflict with Ukraine, but cheap oil is definitely hurting its economy, as well. And Norway has been doing comparatively well, but people began worrying about the health of its economy a couple months ago.
And though everyone from OPEC to the IEA to major investment banks thinks that oil prices will eventually recover, it’s getting harder to tell how far off ”eventually” is and how everything will shake out once things get there.