Brace for turbulence

US crude futures settled below the psychologically crucial $50/bl mark yesterday for the first time in more than three months – pointing to further turbulence ahead.

The dip is validating forecasts by top banks such as Goldman Sachs, Barclays and Bank of America Merrill Lynch (BoAML) that further dips are likely as demand seasonally slows in the third quarter before any sings of the decline bottoming out emerge.

“The sell-off of the past three weeks warns of increased short-term risk to the downside,” UK-bank Barclays said. “The oil market has struggled to get back on its feet since bottoming in the first quarter.” 

While the “panic level” for the market is still lower than the recent drop just below $50/bl, the drop to around $42/bl in March is “definitely unsettling,” said IAF Advisors director of research Kyle Cooper. Some companies get in trouble at around $50/bl but “a lot are hurting” at around $40/bl, he said.

Perhaps signaling a fresh round of belt-tightening by US independents, Chesapeake said that it will stop paying common stock dividends beginning in the third quarter as the fall in prices squeezes cash flow, limiting the independent’s ability to fund drilling. Suspending the dividend of $0.35 per share will save about $240mn annually, it said.

Warning of a wider impact, Moody’s Investors Service said US banks with high energy-sector loans may have to earmark more funds to cover losses in the event of a prolonged slump in oil prices. As a percentage of common equity, energy loans were the highest for BOK Financial, at 102pc, followed by Hancock Holding at 99pc and 96pc for Cullen/Frost Bankers.

“The major risk for these banks is a prolonged slump in oil prices, which would weaken the energy companies’ ability to offset diminished cash flow with expense cuts,” Moody’s said. “The problem worsens the longer the prices remain depressed, leading to higher provisions for the banks.”

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