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Oil's "transitory" fall starting to have long-lasting impact

Aaron Task
Editor in Chief

Oil staged a remarkable intraday rally Wednesday, rising 10% from its low after the Fed suggested rate hikes are further off than previously expected, even as it removed the "patient" language from its statement. But oil's prevailing trend resumed Thursday: In recent trading, WTI crude futures were down over 3% and Brent crude was off 2.8% after Kuwait's oil minister said OPEC had "no choice" but to keep production intact or risk losing market share.

Related: OPEC Secretary General masters the obvious, denies cartel targeting U.S. frackers

The Fed believes oil's decline is "transitory" but the steep drop since mid-summer is having a long and far-reaching impact. The macroeconomic and geopolitical affects are fairly obvious and have been widely discussed. Less well known and a step beneath the surface, the fallout includes:

  • Concerns about bank lending to energy companies: About $1 trillion of loans were made to U.S. shale producers in the past decade and banks such as Citigroup, Goldman and UBS now "face tens of millions of dollars in losses" on those loans, The WSJ reports. Of course, "tens of millions" is chicken scratch in the context of $1 trillion in loans and in comparison to the losses incurred after the bursting of the credit bubble in 2008. But the oil-related losses will rise if crude prices fall further and, at a minimum, "mark a setback for Wall Street after global banks earned $31 billion in fees over the past five years" for energy-related financings, according to Journal.
  • Abandon Shale! The Journal also reports energy majors Chevron, Exxon and Royal Dutch Shell have "packed up nearly all their hydraulic fracturing wildcatting in Europe, Russia and China.
  • More pain for energy investors: "A lot of pain -- and writedowns -- are in store when drillers’ first-quarter numbers are announced in April and May," Bloomberg reports, noting many drillers are valuing their reserves at $95 per barrel for accounting purposes because the SEC requires them to use 12-months of average prices.
  • Winner, winner (fried) chicken dinner! Oil's fall reaccelerated after the IEA warned last week that the global production glut is getting worse and the U.S. may soon run out of storage capacity. But that's an opportunity for storage companies such as Kinder Morgan and Magellan Midstream Partners LP which are "benefiting from rising demand for onshore tanks -- and higher prices to rent limited space," Bloomberg reports. Refiners such as Valero, Tesoro and Marathon Petroleum have also benefited as the cost of their prime raw material has fallen sharply.

That's just a sample and just from today's reporting.

Related: Oil's "race to the bottom" shows OPEC's irrelevance: Ian Bremmer

So what's the outlook for oil prices from here and what's been the impact on U.S. consumers? Watch the accompanying video where Henry Blodget and I discuss.

Related: Oil's fall picks up steam: Good for everyone, except energy producers

Aaron Task is Editor-at-Large of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.