Fed interest rate hike: implications for the energy sector

Report summary

On 16 December 2015, the US Federal Reserve raised the target range for the federal funds rate by 25 basis points to 0.25–0.5%. Forward guidance from the Fed suggests rates will rise to 1.4% in 2016, 2.4% in 2017, and 3.3% in 2018. What, if anything, does this mean for the energy sector? Corporate positioning in a low oil and gas price environment will determine the impact as financial markets start to recalibrate risk and place closer scrutiny on bank lending. Specifically, committed developments already underway are likely to be largely unaffected by the Fed move but cash flow negative unconventional players will find banks less supportive, and what debt they do raise will be more expensive. Meanwhile, the renewable sector is considered largely insulated, at least for now. While the cost of borrowing may have just become a little more expensive, the Fed hike is inconsequential when considered in the context of a very low oil and gas price.