Sorting out balance sheet issues stemming from prolonged cheap oil could prove to be Wall Street's greatest challenge in 2016.
On Tuesday, markets and commodities responded positively to the world's top oil producers' weighing an output freeze. But that did little to cheer energy investors, and oil slid in intraday trading once more.
Without a sustained rebound in commodity prices, one of the key energy sub-sectors banks watch to evaluate their loan portfolios will continue to founder. It has the potential to hamper major Wall Street banks to varying degrees, as energy exploration and production has been especially hard hit in the U.S.
The debt of energy E&Ps can suffer the greatest short-term impacts of plummeting oil prices because balance sheet projections can be thrown off by violent commodity market fluctuations. They're often treacherous for banks to invest in, because the loans are backed by assets — to be specific, the oil on E&Ps' reserves, which has little value to a debtor lacking the equipment, time or the desire to extract commodities and recoup value.