When America’s energy boom started big banks were more than willing to fund very expensive drilling projects.
Now that the oil crisis has dropped the price per barrel below $30, big banks are preparing to feel the sting at an increasing rate.
Dozens of oil companies have gone bankrupt and those that are still surviving have cut tens of thousands of jobs.
Three of America’s biggest banks warned last week that oil prices will continue to create headaches for their bottom line.
Wells Fargo announced it was holding back $1.2 billion in reserves to help cover part of the losses it will experience from $17 billion in loans to the oil and gas sector.
JPMorgan Chase is putting aside $124 million to cover potential losses in its oil and gas loans with warnings that it could increase to $750 million if oil prices unexpectedly stay at their current $30 level for the next 18 months.
“The biggest area of stress” is the oil and gas space JPMorgan CFO Marianne Lake, told analysts during a call on Thursday. “As the outlook for oil has weakened, we would expect to see some additional reserve build in 2016.”
Citigroup increased its loan loss reserves in the energy space by $300 million. The bank said the move supports its view that “oil prices are likely to remain low for a longer period of time.”
Citi also says the $30 per barrel price point will require the bank to take $600 million of energy credit losses in the first half of 2016. Citi says that figure could double to $1.2 billion if oil dropped to $25 a barrel and remained as that price point for an extended amount of time.