S&P webinar: Oil price volatility may delay Fed cuts, pressure banks into 2027

➤ Elevated oil prices could keep the Federal Reserve's rates higher for longer, delaying the deposit cost relief banks hoped for until 2027.

➤ US banks reported record net income in the second quarter of 2026, but margins face pressure from expensive wholesale funding and certificates of deposit repricing.

➤ Streamlined regulatory reviews have cut median bank deal approval times to 94 days, supporting potential M&A pickup despite economic uncertainty.

Rising oil prices driven by geopolitical tensions may delay Federal Reserve rate cuts and squeeze US bank margins well into 2027.

Energy market volatility intersects with banking industry challenges as lenders navigate a tightening operating environment, according to experts on the Q3'26 Outlook for U.S. Banks: How Oil Prices Could Impact the Fed's Next Rate Move, an S&P Global Market Intelligence webinar.

"The main issues are the indirect macroeconomic ripple effect, like the sticky inflation, high rates, those are the things that will create more issues for the banking industry," said Zain Tariq, a senior analyst in Market Intelligence's financial institutions research group. "The Fed is forced to keep the Fed funds rate higher for longer in that prolonged, high-rate environment, which is where bank balance sheets feel the pressure."

Market expectations for Fed rate cuts have cooled significantly, with consensus now pointing to rates remaining steady in the near term. A polling question during the webinar showed most attendees expect the Fed to hold rates steady rather than cut them. Without rate cuts, banks are unlikely to see meaningful relief on funding costs, and margin protection will depend heavily on loan repricing.

Crude oil is priced in a global market, but its effects are felt very locally, Joe Mantone, editorial senior lead for financial institutions at Market Intelligence, said.

"For US banks, the implications are significant; energy inflation can affect consumer spending, deposit behavior, funding costs, asset quality and loan demand," Mantone said.

Access the webinar here.

Oil market tensions ripple through the banking sector

Kurt Barrow, head of oil, fuel and chemicals research at S&P Global Energy, explained how conflicts in the Middle East, particularly around the Strait of Hormuz, have driven oil price volatility. The Strait accounts for about 20% of global oil flows, making its closure a significant market risk.

"Iran has the ability to now close the strait with some fairly low military cost... with these drone strikes.. that they can launch," Barrow said during the webinar.

S&P Global Energy's base case assumes periods of accommodation during which moderate production levels reach markets through alternative arrangements, including shuttle tanker operations, he added.

Higher energy prices contribute to inflation, which affects consumer spending, deposit behavior, funding costs, asset quality, and loan demand. The volatility in oil prices has also contributed to swings in bank stock valuations, though as tensions ease, valuations have rebounded.

"Early on, headlines around private credit, redemption and pressures knocked market sentiment. Right after that, we saw tech-driven volatility," Tariq said. "And then we had the March Madness. Every year, something seems to happen in March. This year was marked by geopolitical tensions in the Middle East, which drove oil prices higher, hitting economically sensitive sectors, like banking."

Funding costs remain elevated despite strong profitability

US banks reported record aggregate net income exceeding $90 billion in the second quarter of 2026, driven by strong non-interest revenue, active capital markets trading and tight expense control. However, elevated funding costs continue to pressure margins.

Deposit growth, which was strong in late 2025 and early first quarter of 2026, slowed significantly in the second quarter due to posttax season trends and the Fed holding rates steady. Banks are increasingly reliant on expensive wholesale funding and brokered deposits, which erode margins. A large portion of certificates of deposit (CDs) will reprice at higher rates over the next year, locking in elevated funding costs into 2027.

"Without rate cuts from the Fed, banks won't be able to get much relief on the funding side, so protecting margins will almost entirely be dependent on fixed-rate loan repricing," Tariq said.

Margins are projected to hover around 3.25% through the end of 2026, with only modest improvement expected in 2027. Return on assets remains healthy at 1.22%.

Regulatory changes boost M&A prospects

Despite economic headwinds, the M&A outlook for banks has improved significantly due to streamlined regulatory reviews. The median time to close a bank deal in 2026 has dropped to just 94 days, down from 134 days in 2025 and 187 days in 2024.

"The regulators have simplified application reviews and moved away from endless back-and-forth letters," Tariq said. "That cuts execution risk drastically and gives off a much higher confidence that deals can actually close in a reasonable time frame."

Deal activity picked up significantly in the second quarter of 2026, with around 45 transactions announced, compared to 36 in the first quarter. For deals with asset sizes under $1 billion in asset size, median approval times have fallen below 80 days.

The banking sector's M&A activity has been significantly dampened by the higher-interest-rate environment, and oil price volatility adds another layer of complexity to an already challenging landscape.

However, Tariq cautioned that "valuations remain the key gating factor and it really depends on a lot of these updates in the Middle East, the geopolitical conflict, how those impact valuations and whether we are going to see an uptick in deal activity in the second half of this year."

The core strategic drivers for bank consolidation remain in place, including sluggish organic loan growth, elevated funding costs, and heavy technology investments that make achieving scale a priority for many bank boards.

– Access the Market Intelligence webinar replay portal. – Read first-quarter 2026 US commercial banking outlook coverage here. – Read second-quarter 2026 US commercial banking outlook coverage here. – Access more Banking webinars.

Robert Clark contributed to this article.

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