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Quiet Before The Storm: Oil CDS udpate

11 May 2020 by jbchevrel

Over the past month, oil&gas CDS have rallied tighter, for the majority of the American names in our universe. The exceptions came from some distressed oil&gas credits that are more special situations than tracking the broader market’s moves. Oil prices have rallied as people believe that the lows of demand may be coming to an end with economies beginning to reopen. WTI prices have more than doubled in a bit more than a week. There is evidence that demand has bottomed in the short term. US gasoline demand has ticked up for 2 consecutive weeks, rising from 5.3mbd in mid-April to 6.7mbd on May 1st. On the supply side of the equation, shut platforms + OPEC+ deal have taken huge volumes off the market. US oil production has declined by -1.1mbd since the end of March, dipping below 12 mbd at the start of May. This ‘reopening rally’ seems vulnerable to both a more sustained slow down in activity and the potential risk of a 2nd wave. The risk of a 2nd wave of infections triggering some re-shutdowns is real, over the next 3-6 months, although in the short term, the bar looks high, just because the re-opening is very fresh in most western economies. On the supply side of the equation, the fact that Saudis unilaterally decided to cut another 1mbd today with nothing in counterpart for that, and the market reaction is quite telling. Meanwhile, oil CDS enjoy a strong price action, both in Europe and in the US. Some names display decent negative cash/CDS basis, especially in the US. In gas world, prices have rallied aggressively too. Nymex natural gas prices traded below $2/MMBtu for much of 2020, but rose by more than 30% since mid-April to a recent high of $2.1+ MMBtu last week. It has much to do with shut facilities in the Permian basin region, and other factors including an explosion of the Tetco gas pipeline.