Is This called Shooting Yourself in the Foot.
Given the world outlook a few months back it would have been a good bet that oil prices would keep rising, particularly with the situation in Iraq and Syria. But instead we have seen a 50% fall!
Russia depends quite heavily on Oil exports so could the unexpected drop in price have been manipulated to cause damage to Russia, that’s not possible of course as to manipulate markets is Illegal.
The lower oil prices are also extremely dangerous for the USA economy, as it seriously impacts on the banking sector as they bet quite heavily on Oil Derivatives. That is, an Oil producer makes a deal with the banks and fixes the price of a barrel at a date in the future, if the price of Oil goes up then the banks profit, if it drops, then the banks have to cover the loss. At a time when the law of supply and demand states Oil prices should go up, who would have bet on them dropping 50%?
A drop of this level could mean the banks Lose a vast amount, not $millions or $ Billions, but $ Trillions.
If that happens then we could see some ‘Banks in Resolution’ (as they now call Bankruptcy) and a result of that resolution will be ‘Bail Ins’. The Dodd Frank Act that was designed to protect the US taxpayer by ending Bail Outs and authorising the banks to follow the lead of Cyprus and simply take depositors funds. However, to protect the depositor, any Federal Deposit Insurance Corporation (FDIC) insured bank were not allowed to put depositor funds at risk for their bets on derivatives, but that part of the act was repealed earlier this month!
So, if a bank fails due to its exposure to Derivatives, it will not only impact on the depositors, but also mean a huge bill for taxpayers as they will need to fund the FDIC guarantee.
So was the recent change in legislation driven by the fact that if the Oil prices don’t rise soon, some of the banks may be wiped out if a bail out isn’t available?
The ‘manipulation’ of the oil price has already affected investors in capital protected structured notes, particularly if they are holding notes with an American barrier.
|15.10.2014||Barrier Touched – FRONT-MONTH FUTURE WTI LIGHT SWEET CRUDE OIL (CL1)
Please be informed that CL1 (Front-month Future WTI Light Sweet Crude Oil) has triggered the 79.00% Barrier at USD 81.960000 on 15 Oct 2014. Consequently, the product offers no more capital protection at maturity.
If the counterparty is a US bank that bets on Oil derivatives then the situation could become a great deal worse.