Plummeting oil prices have been suggested as a likely “primary reason” for US credit market volatility and historic lows on Treasury yields against the backdrop of markets suffering a historic sell-off on 9 March, according to strategists cited by CNBC.
Emphasising that the credit market is highly sensitive to oil price fluctuations since companies are involved in energy production, distribution and exploration issue a “very large portion” of US high-yield bonds, fixed income strategist Thomas Tzitzouris of Strategas Research Partners is quoted as saying:
“There’s just a lot of leverage there."
The vulnerability of these companies to oil price “shocks” has been confirmed by Charles-Henry Monchau, chief investment officer of Dubai-based Al Mal Capital, who adds:
“They’re on the brink, for some of them, of bankruptcies, and obviously this could have a ripple effect on the whole credit market,” he said on CNBC’s “Capital Connection”.
Oil prices climbed for a second day on Wednesday, as Brent crude futures rose $1.44, or 3.9 percent to $38.66 a barrel by 0226 GMT, while US West Texas Intermediate (WTI) crude gained $1.12, or 3.3 percent to reach $35.48 per barrel.
Despite crude futures rebounding, Thomas Tzitzouris cautions that they are still too low for US producers.
“Roughly speaking, you can make the argument that below $40 oil, most of these names, especially in the high-yield space, really can’t survive. That drop in oil was perhaps the final straw for the US credit markets.”
Referring to global markets being sent into a tailspin on Monday over Saudi Arabia’s decision on a production hike after collapsed OPEC+ talks on a deal to slash crude output, Stephen Schork, editor of the Schork report, added that the US shale industry had been hovering on the cusp of “major bloodletting” before those events.
“The decision by Saudi Arabia and by Russia over the last week is just going to hasten the demise of a significant portion of the US shale patch over the next year,” he said.
Income strategist Thomas Tzitzouris predicts a “knock-on effect” of the developments for the US bond market, with an imminent recession looming.
“Credit markets are signalling that we’re getting close to the point of no return, where a recession is more or less inevitable… All these markets — Treasuries, equities, credit — are signalling that right now, the US is very close to a recession within the next four to eight weeks,” he said.
Oil Price Slump
On 9 March, oil prices plunged over 30 percent after OPEC and its allies failed to align their stances on production cuts last week.
A three-year agreement between OPEC and Russia ended on Friday after Moscow rejected the proposed additional 1.5 million barrels per day cut to crude production until the end of 2020 to cope with the outbreak of coronavirus, insisting on maintaining current volumes.
As a result, OPEC+ member states will have no obligations to limit oil output starting from 1 April.
OPEC key producer Saudi Arabia responded by removing all limits on its own production, leading oil prices to nosedive over the supply shock.
The move sent a ripple effect through financial markets, as intense investor anxiety over the continued spread of the coronavirus was further compounded by the plummeting oil price, triggering massive market losses on Monday.