- Key insight: Oil drillers are more reluctant to grow than they used to be amid rising energy prices due to concerns that the spike will be relatively short-lived.
- Supporting data: The WTI benchmark hovered around $100 a barrel at the start of 2014, but had fallen below $35 a barrel by February 2016.
- Expert quote: "You have to have some certainty, some stability, some visibility into what those prices might be. It's just so volatile right now that there's not a lot of that." — Mike Bock, co-founder of a boutique energy investment banking firm
Oil prices have spiked during the Iran war, but banks that lend to oil companies say clients aren't ramping up production and are cautious about getting burned in the event that prices tank.
That lesson has proved painful for oil producers and some banks before. A plunge in prices in 2014 caused a wave of bankruptcies and loan defaults, prompting a steady retreat by some lenders. A collapse in demand during the pandemic brought more stress.
Banks that stuck with the oil industry say those downturns have prompted a massive shift, with companies carrying far less debt and displaying a hesitance to chase growth prematurely. It's one reason why many drillers are now holding off, rather than tapping bank loans to scale up production, lenders and analysts say.
Markets still seem to believe the historic disruption to energy supply will prove temporary, giving producers yet another reason to be cautious.
"We're seeing extreme discipline from the producers, because they've been through a lot over the past decade," said Marc Graham, head of energy at Dallas-based Texas Capital Bancshares.
U.S. energy companies had some 547 active rigs as of May 1, according to a tracker from Baker Hughes of oil and natural gas rigs. That's up by three compared to a week earlier but still 37 below the level a year ago.
Producers are largely taking a "wait-and-see" approach and aren't making big changes to their 2026 plans, said Alex Trlica, executive director of energy financial services at Tulsa, Oklahoma-based BOK Financial.
"Most of our customers are being cautiously optimistic," Trlica said. "They're making tweaks to try to bring forward any production they can — but not wholesale changes."
Producers are wary that the roughly $100 a barrel price on West Texas Intermediate, or WTI, crude can quickly return to where it started the year: under $60. With that scenario top-of-mind, producers are sticking to the status quo and planning to "maintain capital discipline," said Jack Herndon, market president for Midland, Texas, at Cullen/Frost Bankers.
"It's more of managing the downside, not getting really excited about the upside at the moment," Herndon said.
Backward prices
Prices for the WTI U.S. benchmark have soared since the Strait of Hormuz's closure has blocked a fifth of the world's oil supply. But prices have been closer to $65 or $70 for contracts dated a couple of years in the future, according to the CME Group, suggesting traders believe oil prices will snap back down.
It's what oil analysts call "backwardation," and it's making the math on any drilling projects less appetizing.
"There's a lot of backwardation in the curve," Herndon said. "Everybody has that in mind on any significant capital outlay."
With the war now in its third month, markets are getting a little less backward but only barely, said Mike Bock, co-founder of Petrie Partners, a boutique energy investment banking firm.
Prices keep swinging wildly, making it hard to know whether the projects they decide on today will still fetch higher prices once a drill is up and running.
"You have to have some certainty, some stability, some visibility into what those prices might be," Bock said. "It's just so volatile right now that there's not a lot of that. So maybe a hint of optimism, but I don't think it's being reflected in investment decisions."
Lingering scars
The pain a decade ago has led producers to absorb a key lesson — "don't plan for sustainable high prices," Bock said.
The WTI benchmark hovered around $100 a barrel at the start of 2014. But oil markets had a glut of supply, thanks to the U.S. shale boom that's now made the country the world's biggest producer. An OPEC decision to keep output steady, rather than cut supply, helped force a violent plunge in oil prices.
By February 2016, WTI prices had sunk below $35 a barrel.
Dozens of producers filed for bankruptcy. Others were forced into merging with competitors. Banks that had energy exposure, still recovering after the 2008 financial crisis, faced renewed pressure on their loan books.
And investors started to demand more discipline from oil producers, Bock said. Rather than throwing cash at growth-focused companies, they prioritized the steadier firms that returned capital to shareholders through dividends and buybacks.
That "evisceration of capital" led to producers cutting their capital expenditures, Texas Capital's Graham said, slashing the amount of debt they carry in any given quarter.
"We have extremely disciplined companies who aren't focused on growth for growth's sake," Graham said. "They're focused on a return of capital model — share buybacks, distribution of cash flows."
That investor-driven vision could dampen aggressive growth plans.
"A big ramp in production doesn't necessarily fit with what they've been mandated to do," BOK Financial's Trlica said.
Political winds
Investors weren't only protesting the ups and downs in oil producers' cash flows.
As climate change worries escalated, some asset managers eliminated or cut their exposures to the oil and gas industry. Larger banks, particularly those in Europe, faced pressure to stop lending to the sector. Regulators under President Joe Biden were starting to scrutinize bigger banks' exposure to climate risk.
The pendulum swung back after President Donald Trump's reelection. The Net-Zero Banking Alliance, a global group of banks looking to cut their financed emissions, shut down last year.
Some banks are now reengaging with oil and gas companies after trimming their exposures, Bock said. But oil executives have realized that those banks "aren't necessarily going to be there when times are tough," Bock said.
Regional banks may have won some business as a result, he added.
The complexity of the oil sector makes it hard for new entrants, said Brett Rabatin, a bank analyst at StoneX Group. But it's proved fruitful for those who know it well, he added.
"If you're in it, and you're very good at it, you've got a long track record in it, you've got engineers that are going to double-check what the borrowers are telling you proven reserves are, it can be one of the more profitable [commercial] lines of business," he said.
Long records
The lenders that stayed say they still like the sector, even as they've sought to insulate themselves from the industry's booms and busts by growing other parts of their business.
Industry underwriting has improved significantly over the years, Cullen/Frost's Herndon said, as lenders have added more restrictive provisions to loan agreements and upped requirements for hedging.
Those hedges are dampening the boost from today's higher oil prices. By protecting themselves against the industry's price swings, producers have lost some of the upside when prices rise. The flip side is that the industry has gotten "a lot more predictable even through the down cycles," Herndon said.
Energy lending has been in BOK Financial's DNA since the Oklahoma bank was founded in 1910, Trlica said.
"We gain a whole lot of comfort around that track record and our ability to manage through the inherent volatility of lending into a commodity-based business," he said.
And as a bank headquartered in the Lone Star State, Texas Capital is "unapologetically supportive" of the state's biggest industries, Graham said. The long-term trends are positive, he added, given the ever-rising demand for energy — whether it be from nuclear, renewable sources or fossil fuels.
"We, unlike other banks, believe in the future of this industry," Graham said. "We firmly believe that the world's going to need more energy tomorrow than we produce today."
