How oil could kill the banks

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Energy prices continue to wallow near decade lows with no real visibility on when that might change.

And while that’s good for consumers and businesses that rely on cheap fuel, it also tells a story about a weak global economy that doesn’t seem to be getting any stronger. And there’s a bigger shadow this energy issue casts.

There’s plenty of oil out there and Iran is about to come on line, adding to the glut. And the U.S. in another case of Bizzaro World counterintuitiveness just lifted the 40-year ban on domestic oil exports.

Now U.S. producers can export oil internationally.

What is the point? Well, in Washington, D.C., that’s precisely the point. You don’t pass this kind of legislation when it’s important to pass it, like when oil prices are high. You wait until no one is looking and no one cares — remember it’s an election year, so there’s no opposition — and it’s sitting on the books when you want to use it.

Basically, it’s a kickback to big oil companies from Congress for all their support, while no one is looking.

According to oil-services firm Baker Hughes, there are 871 wells in operation in the U.S. right now; last year at this time, there were 2,266. I don’t think U.S. drillers will be exporting anytime soon.

Also, there’s a more disturbing implication for what this oil glut is doing. But it’s not energy firms that are the prime targets; it’s the banks.

On Maria Bartiromo’s FOX Business show, a hedge-fund manager was talking about how the next shoe to drop in the energy sector is the financial sector.

His prediction was that 25 percent to 30 percent of today’s oil and gas companies will be bankrupt in the next three years. And the bag holders will be the banks that are holding their defaulted loans and lines of credit. And this is partly to blame for why the high-risk credit market is starting to fall apart.

But we’re only at the tip of the iceberg. If the U.S. loses all these energy-sector firms, we could see another collapse the size of the last financial crisis.

Given the bad shape most major banks are in even now, this could be a death blow for some of these “institutions” and an economic tsunami for all of us.

If you invest, there is no reason to be in financial or energy stocks at this point. The volatility is going to ramp up by an order of magnitude in coming quarters, especially if the East Coast continues to experience a mild winter, since that will lower energy demand even further which will hammer prices further.

Also, any utilities that haven’t spun off their energy production divisions should be avoided as well.

–GS Early

Personal Liberty

GS Early

is editor of Liberty Investor Digest™ and managing director of Fresh Eyes Media, a media management and consulting firm that develops custom content and marketing solutions for financial businesses and publishers. Gregg has been a leader in the financial publishing business for two decades and has worked on content strategies with every major publisher in the industry, as well as organizations like CNBC, Morgan Keegan, Folio Investing and Moneyshow. He is an award-winning writer and editor and has built many of the top publications available to investors today. His specialties are emerging technologies (biotech, nanotech, robotics), defense and cybersecurity. He is a graduate of James Madison University.