Oil Tumbles To $44 Handle After Saudis Confirm "No Decision" Next Week, Fed Crackdown On Bank Commodity Holdings

We hinted earlier and now Saudi Arabia has confirmed that it "doesn't expect any decision" next week when oil producers meet in Algiers. Oil's reaction was swift with WTI tumbling to a $44 handle very quickly:

  • SAUDI ARABIA SAID TO SEE ALGIERS MEETING AS CONSULTATION
  • SAUDI ARABIA DOESN'T EXPECT DECISION AT ALGIERS: DELEGATE

This move was exaggerated by the report that The Fed is clamping down on bank holdings of commodities:

  • FED PROPOSES AGGRESSIVE RULE ON WALL STREET COMMODITY HOLDINGS

As we detailed previously...

1) the ban on 'investing in non-financial companies', which is highly ironic given that other central banks are directly buying massive stakes in the world's corporate entities; and

2) restrictions on physical ownership of commodities, which raises eyebrows on both oil manipulation and the hoarding of precious metals ahead of The Fed losing control.

But The Fed expanded it today:

The Federal Reserve Board on Friday invited public comment on a proposed rule that would strengthen existing requirements and limitations on the physical commodity activities of financial holding companies. The proposal would help reduce the catastrophic, legal, reputational, and financial risks that physical commodity activities pose to financial holding companies.

A limited number of firms supervised by the Board engage in physical commodity activities and investments. Some firms are permitted by law to engage in a broad range of physical commodity activities, including the extraction, storage, and transportation of commodities. Others may engage in more limited activities, such as commodities trading. The possibility of an environmental accident due to these activities presents significant risks to the firms.

Based on a broad review of firms' physical commodity activities as well as comments received on the Board's 2014 advance notice of proposed rulemaking on this matter, the proposed rule would:

  • Require firms to hold additional capital in connection with activities involving commodities for which existing laws would impose liability if the commodity were released into the environment;
  • Tighten the quantitative limit on the amount of physical commodity trading activity firms may conduct;
  • Rescind authorizations that allow firms to engage in physical commodity activities involving power plants;
  • Remove copper from the list of precious metals that all bank holding companies are permitted to own and store; and
  • Establish new public reporting requirements on the nature and extent of firms' physical commodity holdings and activities

Bloomberg summarizes the new regulations:

  • Regulation would require banks to boost capital to support activities involving physical commodities, Fed says in statement Friday.
  • Proposal would impose a 1,250% risk weight on physical commodity assets investment banks such as Goldman Sachs and Morgan Stanley are allowed to own through “grandfather provision,” Fed says
  • Plan would impose 300% risk weight on physical commodity holdings permissible through “complementary authority” and merchant banking
  • Fed would tighten “quantitative limit” on physical commodity trading firms may participate in
  • Proposal would rescind authorizations that allow firms to engage in physical commodity activities involving power plants
  • Rule would remove copper from list of precious metals banks are allowed to own and store
  • Fed says it will accept public comment on the proposal for 90 days
  • Officials estimate proposal would mean about $4 billion in additional capital for financial firms’ current activity

This drove oil to a $44 handle.