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Non-Linearity Kicks In

09 March 2020 by jbchevrel

Energy-related single-name CDS logically underperformed in CDX IG and were heavy contributors to the move in fair value (wider +42bp at 136bp), after crude prices collapsed overnight. The widest name OVV (oil) came +583bp to 837bp. APA came +403bp to 605bp. OXY came +383bp to 613bp. WTI came down another -c30% over the weekend when the future opened last night. It came close to $27/bbl while it peaked at $66/bbl (-59% draw down) just 2 months ago, at the height of the Iran/US geopolitical crisis. For reference, it had come as low as $26/bbl back in Q1 2016. Saudi Arabia announced that it was cutting its official prices by the most in almost 20 years over the weekend (by $6-8/bbl). This move is another step effectively confirming the end of the OPEC+ cartel. Russia had indeed slammed the door to a 1.5mbpd output cut accord previously, something that the Saudis had been pushing for. Saudi Arabia in retaliation signaled that they would boost output above 10mbpd next month. This is as the current OPEC+ deal to curb output expires at the end of this month. Demand-wise, the picture is still dominated by the covid19. Some data as of February out of China. Exports reportedly fell by -17% y/y in January and February while imports declined -4% y/y. Adding to that, Italy announced it was quarantining Lombardy as well as 14 provinces in 4 other regions, to control the spread of covid19. Those restrictions impact 16 million people and will stay in force until (at least) April 3rd. The number of covid19 cases in Italy had jumped +25% to 7,375, with deaths increasing +57% to 366.