Monday Humor (Crude Lemmings)

It’s been particularly amusing (and somewhat disquieting) to witness the rapid shift in sentiment that’s helped HY energy spreads compress to levels last seen when crude was trading around $80/bbl.

(Bloomberg)

Markets went from pricing in the end of the world last February (when we were staring into the deflationary doldrums after a truly miserable start to the year) to acting as though the OPEC/non-OPEC production cut deal is a cure-all for commodities.

This despite the fact that US producers don’t seem to understand that borrowing more money and tapping investors via follow-ons is only prolonging the inevitable as pumping more now only serves to offset the very same production cuts that have driven prices back up to levels where pumping is once again feasible. I’ve said it before and I’ll say it again: it’s creative destruction destroyed.

For those who might have missed it, have a look at the following chart from Goldman which shows that as of last February, nearly three quarters of HY energy bonds traded at less than $80. Now, that figure is below 2%!

(Goldman)

As noted here last week, investors are so sure about the rosy prospects for crude prices that Citi is out asking clients who thinks HY energy will soon trade inside HY as a whole. That, I contend, is full-energy-retard. Especially considering the fact that the OPEC production cut agreement looks like it will be a six months an out deal. Perhaps Bloomberg put it best on Sunday: “[The deal] seems a very quick and painless solution to an oversupply problem that has bedeviled the oil market for the past two years, brought several producers to the brink of collapse and tipped others over it.”

Nevertheless, market participants remain ebullient. Below, find the results from a new survey conducted by Barclays. As you’ll see, clients have their story and by God, they’re sticking to it.

Via Barclays

With 145 participants in this year’s survey, respondents are (unsurprisingly) less negative on commodity credits than at the beginning of 2016. This year, only 15% of respondents are underweight and comfortable with that position, down from 65% in early 2016.

High Yield Energy

• Over 80% of investors are overweight or market weight. If investors could instantly reset their portfolios, on balance, they would shift slightly from overweight to market weight. 69% of investors would like to buy on weakness.