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Energy CDS ‘Squeeze’ Update

24 November 2020 by jbchevrel

(It’s worth zooming on the top-left part of the chart, to cancel the effect of RIG and NBR.) Oil prices soared today, and WTI is now $45/bbl. The last time WTI Crude traded at $45 per barrel was eight months ago, in early March this year, just before Saudi Arabia and Russia disagreed on how to manage oil over-supply. In the light of depressed demand due to the first national lockdowns in spring (including China’s…). Yesterday, the University of Oxford and AstraZeneca said that interim trial data from their Phase 3 trials show their vaccine is effective at preventing COVID and offers a high level of protection. This adds to the similar findings of Pfizer/BioNTech and Moderna earlier this month. In CDS index space, that resulted into a continued outperformance of CDX IG s34 and older series vs s35. This is as some of the Fallen Angels are both higher-beta and sensitive to oil, thus have seen their premium tighten aggressively today. Occidental Petroleum Corp CDS is tighter -91bp today. Apache Corp CDS is tighter -39bp today. Other Fallen Angels are generally high-beta too and pushed this roll move, as well. Macy’s CDS is tighter by 107bp today, CCL -31bp, RCL -49bp and Nordstrom -33bp. The NAV of IG34 has outperformed IG35’s by close to 2bp today as a result. Another technical sign that the energy market is recovering is that ICE Brent time spread has edged back into backwardation configuration (last seen in late June). OPEC+ will likely welcome a tightening in the forward curve, sign that demand is picking up and that output cuts are less/no longer needed. On that note, there is a OPEC+ meeting in a week’s time, and is at stake whether they delay easing cuts from 7.7mb/d to 5.8mb/d on January 1, 2021. At this stage, it does appear that market participants are expecting a rollover.