09 September 2020 by jbchevrel
US energy CDS have had a tougher couple of sessions, contrasting with this summer. This is largely due tp the notable drop in crude benchmark, first of which WTI, which went quickly from $43/bbl to $36/bbl yesterday. Despite a retracement today to $38/bbl, this renewed volatility in crude future isn’t of thee taste of energy CDS, most of which have now re-priced wider. Today in a second consecutive session of widening, we mark: APA +11 OVV +6 OXY HES +4 DVN +2. This is to be compared with CDX IG fair value, tighter -1 today. CDX IG index is also tighter by close to -1 today. So why has crude volatility increased? First, it is correlated to other risky assets, leading to blame the US tech stocks, although there is not much in common for these two markets. On the fundamental side of things, the production recovery in the Gulf of Mexico, which was hit by hurricane Laura, clearly caused a shift in sentiment. Next to this, you have uncertainty about OPEC+ compliance and rising OPEC+ supply in August, which has contributed significantly to the crude price decline. On the side of that, Iraq may be asking for an additional two-months extension to compensate for missed production quota. Also, , statements from Russian Energy Minister Novak regarding the need to boost OPEC+ production has sparked concerns over the continuity of the OPEC+ agreement, which continues to be one of the major pillars in a period of fragile demand recovery. Adding to the ‘snow ball’, in response to these bearish factors, Saudi Aramco has slashed its Arab light oil prices to Asia by -$1.40/bbl against prices of Dubai/Oman crudes which points at weaker demand in Asia. Chinese imports have slowed, after a strong recovery starting in Q2.