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09 30 2015 | by Victor Xing | Capital Markets

Did the ultra-stimulative monetary policy contribute to the energy crash?

The drivers behind the energy boom

The energy boom is a direct results of years of ultra-easy monetary policies by the Federal Reserve.  Policy accommodation and financial repression pushed high-yield borrowing cost to historic lows, which helped finance risky investments including the U.S. shale revolution.

Please refer to this article from 2012: Energy companies turn to high-yield market to fund shift to oil

The effects of higher energy production

The U.S. shale revolution financed by cheap funding allowed the U.S. to become a major oil producer.  Yet, together with energy independence came excess supply.  With excess supply, WTI and Brent crude prices could not be sustained above $100/bbl.  What happened next was a supply driven bust, mixed with lower demand due to uneven growth.

Oil crash
Oil crash

With falling commodities sending jittery investors into less-risky assets, borrowing cost for energy companies in the high yield space have risen, adding to their woes (and resulting in recent job cuts).

Please refer to the following article from July 2015: Default worries close bond market door to oil exploration and production companies

The energy and commodity correction is market’s reaction to policy-induced imbalances.

Next article09 28 2015 | by Victor Xing | Central Banks

Why are long-term interest rates harder to control compared to short-term interest rates by a monetary authority?