03 April 2020 by jbchevrel
Oil price movements have driven to a decent extent the relative moves in EM sovereign CDS space, over the past week. Looking back at this week, we have had a clear outperformance of oil-dependent names, like Russia and Saudi Arabia, tighter on the week. while some other sovereign risks, facing other drivers, performed poorly. It is the case of Turkey and South Africa. So how have we been from $19/bbl to $28/bbl on WTI? How did the focus shift from ‘there isn’t gonna be enough space to store all crude’ and negative price talk to talks of $40+ prices if Trump’s tweet is true. Some upside was first seen after China was said to look to strategically buy oil to fill reserves, estimated by some around 500mb (came $20 to $22). More importantly, after that, President Trump said he had brokered a deal that could result in Russia and Saudi Arabia cutting output by 10MB/D to 15MB/D (came $22 to $27). For reference, this is huge, this is rouglhy representing 10-15% of global supply. But here is the thing. OPEC said they would want US Canada and Mexico to take part in cuts. Trump said he made no offer to cut US output. I haven’t head from Canada (world’s 4th-largest oil producing nation) directly, but Trudeau said his government is in talks with US and OPEC about resolving the price war. The recent crash threatens the very survival of some Canadian producers. Landlocked and lacking enough pipeline capacity to ship its crude to US refineries, Canada’s oil sands in northern Alberta have seen local prices plummet to record lows of less than $5/bbl. From now on, all eyes are now on the outcome of a meeting between POTUS and the oil companies later today, because the sense is that the final figure on cuts will depend on participation by all oil producing nations. On top of that, yesterday, Saudi Arabia called for an emergency meeting of OPEC and non-OPEC oil producers, saying it aimed to reach a fair agreement to stabilize oil markets. Kuwait’s oil minister supported that, and we learnt by Azeri energy ministry (non-OPEC) that the OPEC+ meeting was planned for April 6 and will be held as a video conference. This was first reported by Russia’s RIA news agency. Higher oil prices are in the interest of all sovereigns mentioned earlier, however as we could see, Russia was playing tough. Because their budget is less dependent on crude prices than some others like Saudi. A headline yesterday mentioned them working budget with $20/bbl. And they mean to sound resilient to the threat of further US sanctions. This morning it appeared that Russia hadn’t confirmed their participation to Monday meeting. But then Putin said oil producers should combine efforts. Then Novak said cuts should last a few months. So WTI is now north $28/bbl. We closed Russia 5y CDS at 180 and Saudi at 160. These are tighter by -25bp and -15bp respectively on the week.