I need to know (immediately, if possible), if you are excited about crude.
Because some folks certainly are.
Indeed, WTI and Brent are headed for their best weekly gains in 7 months on the back of bullish supply data, promises from the Saudis re: export caps, jitters about Venezuelan disruptions, and the first signs that the temerity of US operators is waning (think: Anadarko and Whiting).
“There’s less crude oil,” Bob Yawger, director of the futures division at Mizuho Securities said Friday. “That’s all there is to it.”
Today we’re seeing WTI push towards $50 – a notable development considering it was just a couple of weeks ago when we were celebrating Brent approaching those levels.
Also worth noting, WTI rose above 200- day moving average today:
As we detailed on Thursday, it’s entirely possible that current prices should be even higher given geopolitical concerns. The latest North Korean missile launch only underscores that assessment. Simply put, there’s no geopolitical risk premium built into these prices. More on that here:
But the market is focused intently on US production – and understandably so.
One of the points we and all kinds of other folks have been pretty keen on discussing is the extent to which US operators aren’t likely to stop borrowing and drilling until the bond market takes the keys away, something credit investors have been loath to do even as equities have been pricing in a much less benign outlook.
Consider this out earlier from Bloomberg, recounting Thursday’s HY market action:
- Junk bond market was resilient with yields unchanged even as stocks wobbled and the VIX surged; yields for BBs dropped to a new 3Y low.
- Investors shrugged off modest outflows from mutual funds as they continued their search for yield with the high yield new issue market pricing Blackstone-owned CCC-credit Vivint Inc at the tight end of talk after revising its structure and covenants
- It must be borne in mind that while stocks wobbled and Lipper reported an outflow of $208m from U.S> high yield funds, stocks were still close their new highs and oil was at a 8-week high and has risen in 7 of the last 10 sessions
That bolded bit is key.
When you think about the appetite for junk and the ongoing spread compression, it’s important to keep track of HY supply and HY Energy issuance in particular.
Indeed, it seems entirely likely that spread tightening from here is going to be driven by a dearth of issuance (i.e. by a technical). Consider this, out from Goldman on Thursday evening,
The US HY primary market is set to have its second slowest July since 2010.
With $13 billion of bonds issued by US HY companies as of July 26, this month’s volumes are only slightly above of the post-crisis record low reached in July 2015 (Exhibit 1). In addition to seasonal factors, the slowdown likely reflects the pick-up in volatility in the rates and commodities markets in the first two weeks of the month.More importantly, the decline in new issue volumes has been a strong technical tailwind for secondary market spreads which have tightened by 21bp in July, the strongest month since February of this year.
Within sectors, Energy issuance remains at rock-bottom levels with only one US E&P deal pricing in July. The decline in Energy issuance volumes extends a trend that started in June as shown in Exhibit 2. Given the low near-term refinancing needs in the HY Energy sector (on our estimates there is only about $3 billion of bonds outstanding coming due by the end of 2018), we continue to think the decline of energy issuance is unlikely to signal higher default risk.
Again, something worth keeping in mind.
There’s a lot going on here and whether you believe the lack of HY Energy supply is due to no maturity wall or to management teams suddenly “coming to Jesus” (as it were), you should note that if they stop borrowing and cut back on capex, that will accelerate the rise in crude prices which in turn will embolden them anew, prompting more deflationary drilling down the road, in a never-ending, dead-sprint up the down escalator.
Baker Hughes out later…