Corporate America grapples with huge oil price swings

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0:17Good morning from the Financial Times. Today is Wednesday, March 11th, and this is your FT News Briefing. The good times seem like they're going to keep rolling for Oracle, and corporate America is bracing for higher for longer oil prices. Plus, the private credit market is a mess right now, but it could be worse. The positive is that all of this risky lending on Wall Street is outside of the banking system and isn't immediately something that has spilled over into the broader market. I'm Mark Filippino, and here's the news you need to start your day.

0:58Oracle shares surged after the bell yesterday on a better-than-expected earnings report. The database company co-founded by billionaire Larry Ellison said revenue last quarter jumped 22 % from the year prior to more than$17 billion. Oracle also boosted its revenue forecast for next fiscal year. Both top-line numbers beat Wall Street expectations. Net income largely met forecasts, while capital expenditures increased more than 50%. Oracle has been trying to compete with rivals to supply computing power to AI companies, but it's faced growing criticism on its reliance on OpenAI as a customer and its big increase in borrowing.

1:38For example, long-term debt last quarter, which includes operating leases, rose to$143 billion.

1:51The price of Brent crude was all over the place yesterday. It briefly dropped to just above$80 a barrel before spiking back up to$90. The back and forth was over a social media post from Chris Wright, who leads the U.S. Energy Department. He posted on X that the Navy escorted an oil tanker through the Strait of Hormuz. That would be a big deal because the Strait transports 20 % of all the world's oil. And safety through it has been a top concern for shippers. We'll dig more into that later in the show. And the thing is, shortly after posting the announcement on X, Wright deleted it. And then the White House denied the Navy ever escorted a ship through the strait.

2:29Now, all these wild swings in oil prices are not great news for corporate America. It's been pummeled by the impact of soaring energy prices caused by the war in Iran. Miles McCormick is the FT's U.S. economics correspondent, and he does a little bit of energy stuff for us on the side. Hey, Miles. Hey, Mark. So prices were quick to rise, Miles, but it doesn't look like they're going to be as quick to fall. No, that's exactly it. I mean, they've come off the highs that they hit in recent days, but they don't look set to go back down to where they were before this whole conflict kicked off for quite a while.

3:03In fact, the U.S. Energy Department said yesterday petrol prices would probably not be back below their pre-war level in forecasts stretching out to the end of 2027. And diesel prices wouldn't drop back below their pre-war level until the middle of 2027. So quite a lot of pain on U.S. businesses for some time to come. And just for the record, Brent crude was around$70 a barrel before the U.S. and Israel attacked Iran. Now, Miles, which American businesses are most exposed to these fuel price swings that we're talking about? So a range of businesses are exposed. Some of the more obvious ones are, for example, trucking, which requires a lot of diesel to run its fleets, or agriculture, which again requires a lot of diesel and gasoline to run its farming equipment.

3:52But generally speaking, any industry that relies on vehicles, that relies on fuel, could be airlines, it could be maritime, is going to be hit by this in some shape or form, and their input costs are going to go up. Could some of this pain be alleviated if more supply does come onto the market in some form or another? Yes, absolutely. I mean, the big thing analysts are pointing to is kind of the duration of this conflict and the duration of the kind of shock to supply that we have in the Middle East. If a lot of oil comes back on the market soon, then yeah, that will definitely tamp down on prices.

4:36But as we were saying earlier in this conversation, prices generally are a lot slower to go down than they are to go up. The big question here is for a lot of people, will these higher costs at some point be passed on to consumers? They absolutely will. I've been talking to a lot of business groups and analysts over the last couple of days. And the basic way that a lot of companies are going to deal with these higher costs is to pass it on to their customers. The trucking industry, for example, has fuel surcharge that it adjusts depending on the price of diesel. That'll be passed on to its customers.

5:17The farming industry, which is just starting kind of planting season at the moment, is going to be forced to increase what it charges for its various crops. So all of this is going to kind of trickle down the supply chain and ultimately end up in the lap of the U.S. consumer. and that's something we're going to see in the inflation data that comes out over the coming months. And it's probably going to pile on U.S. President Donald Trump and his Republican Party in the run-up to the midterms. Trump campaigned on a platform to slash gasoline and energy prices, but prices at the pump are now higher than at any time during his two terms in office.

5:56That's right. That's right. Miles McCormick is the FT's U.S. economics correspondent. Thanks, Miles. Thanks, Mark.

6:08So remember how I said it's pretty dangerous to ship things in the Strait of Hormuz right now? Well, that's making it pricey to ensure those vessels that sail through that vital waterway. Insurance prices for ships transiting the Strait have soared 12-fold, which is why it might come as a surprise that Lloyds of London said it'll, quote, provide cover to basically anyone who asks. This comes after the company faced criticism over canceling policies and raising rates for ships stranded in the Gulf. The head of underwriting at Lloyd said the slowdown in shipping traffic is not an issue of insurance, but a question of vessel and crew safety.

6:43Insurers have said higher costs are a reflection of heightened risk and higher oil prices, which boost the overall insured value of a ship.

6:58Investors are giving private credit a bit of a cold shoulder right now. They're pulling their money out as private credit funds are taking losses on bad loans. The outflows then put even more stress on private credit. So could this become a vicious cycle? Here to discuss is Antoine Garry. He covers private capital for the FT. Hi, Antoine. Hi, how are you? I'm doing well. So do me a favor. Walk me through what we've seen in terms of investors getting wary of private credit lately. Yeah, so you've seen publicly traded credit funds called BDCs or business development companies, which are basically filled with loans, financing, private equity takeovers, you've seen those public vehicles trading at sort of substantial discounts to their assets.

7:41So it's telling you that the public market is kind of skeptical of what's inside the BDCs or whether those BDCs will be earning as much money as they have in the past. And then the second thing that's happening is there's this whole other fast-growing crop of credit funds called non-traded BDCs, which are essentially credit funds that aren't listed on the public market. And they instead allow private investors to get out on a quarterly basis up to a limit. Most funds allow investors to pull up to 5 % of the fund's net assets every quarter. A lot of private credit funds, they're seeing redemptions essentially go way beyond that 5 % threshold.

8:27And so it's forcing the investment managers to decide whether to meet all those redemptions or to partially limit them. I want to get back to that in just a moment. But first, I want to get to the heart of what's causing all this chaos. And if I understand it correctly, it's because of losses on bad loans. Well, it's a bunch of factors. First of all, these funds basically all hold floating rate debt. So as interest rates come down, Their portfolios naturally earn less money, regardless of what's happening to the actual companies that have been lent to. But then the other points of pressure are that there are rising fears of defaults.

9:07You're starting to see default rates tick up in private credit. And there's this whole new sort of Pandora's box that's been opened over the past few months, which is how does artificial intelligence create new sort of threats to the business models of technology companies and software companies that are about a third of all overall private credit portfolios. So that's what's really causing all of the pain. Now, I mentioned before that these outflows obviously put even more pressure on private credit funds. Is there a risk that this could become a trend that kind of feeds on itself and makes things worse and worse for a private credit, basically kind of like a bank run?

9:48That's really what Wall Street's focused on. If enough people want to pull money and there's sort of a cascading fear, you know, then the question is, can these funds actually sell loans and repay their investors? And does it create sort of selling pressure, which would depress the values of the loans? If everyone has to go try to find ways to sell their loans all at the same time so they can return money to their investors, that might make the price fall and that would sort of eat into the returns. So Antoine, what are the real-term effects if the private credit market were to really struggle?

10:29What would that do to markets and the wider economy? There's a positive and a negative way to look at that. The negative thing and the thing that we're most attuned to at the FT is would this spill over into the banking system, right? Because banks lend money to private credit funds. And if there are credit issues in the banking system, that ultimately feeds into the cost of money for everyday consumers and basically the overall soundness of the financial system. On the other hand, these funds all grew in the wake of the 2008 financial crisis. And the whole regulatory response there was to push risky lending out of the banking system.

11:08And that's exactly what happened. So the positive is that all of this risky lending on Wall Street is outside of the banking system and isn't immediately something that has sort of spilled over into the broader market or the broader health of the overall economy. Antoine Gara is the FT's U.S. private equity and deals editor. Thanks, Antoine. Thank you. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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