Oil

This 'ticking nuclear bomb' could cause energy bankruptcies, Onyxpoint partner says

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Key Points
  • Oil stocks have fallen sharply this week and that could cause issues with the bank loans that energy companies rely upon, said Shaia Hosseinzadeh of Onyxpoint Global Management.
  • "This sector for the better part of 30 years has been funded by the bank community with very cheap financing ... and that market has mushroomed to about $200 billion," Hosseinzadeh said Wednesday. 
  • Oil stocks have fallen sharply this week after a failed attempt by OPEC+ countries to agree to a production cut, sending oil prices plunging.
  • West Texas Intermediate crude settled at just under $33 per barrel on Wednesday. 
VIDEO4:1104:11
Ticking time bomb in reserve base lending market, the subprime of shale: Expert

The shale oil industry's reliance on bank loans could lead to a wave of bankruptcies if the price of oil doesn't rebound, Shaia Hosseinzadeh of Onyxpoint Global Management said Wednesday. 

Oil stocks have fallen sharply this week after a failed attempt by OPEC+ countries to agree to a production cut, and this could cause issues for the bank loans that energy companies rely upon, Hosseinzadeh said on CNBC's "The Exchange." 

"We've seen the carnage in the equity market, we've seen it in the high yield market, but there's a ticking nuclear bomb in the reserve lending market, and that's like the subprime of shale," when oil prices are this low, Hosseinzadeh said.

Oil prices are under pressure from the price war between Russia and Saudi Arabia and slowing global energy demand due to the coronavirus pandemic. West Texas International crude briefly fell below $30 per barrel on Monday and settled at $32.98 per barrel on Wednesday. 

The dramatic drop in oil prices led to concern about the high yield debt market, where energy companies are a large player. However, Hosseinzadeh said the loan agreements between these companies and banks are also a source of concern.

"This sector for the better part of 30 years has been funded by the bank community with very cheap financing ... and that market has mushroomed to about $200 billion. To put that in perspective, that's about three times the high-yield (energy) market," Hosseinzadeh said. 

Banks have been losing money on these loans for five years, Hosseinzadeh said, and they may not be willing to tolerate the low energy prices. 

"A lot of those banks we think could be calling those loans in at precisely the worst time," Hosseinzadeh said.