Macroeconomic Backdrop for Credit:
Volatility returned to the energy markets in June with oil prices falling over 13% from the beginning of the month until June 21st before rebounding 10% at the end of the month to close only 5% lower than where they started. The primary cause of the decline was additional concerns regarding oversupply. Despite recently extending its output cuts to March 2018, OPEC’s oil output reached a year-to-date high during June. This was largely due to greater than expected volumes from both Libya and Nigeria who are each exempt from compliance with the cut since their oil production was negatively affected by non-market factors prior to the agreement. Libya, for example, is now producing approximately 900k barrels per day compared to just 550k barrels per day in April 2017. This additional supply along with an increase in production from US shale producers caused oil inventories to rise unexpectedly in June which caught the market off guard. In response to these moves, energy related spreads were wider on the month, but betas were significantly lower than in previous periods of significant oil price disruptions. One of the reasons for the more muted response is because the fundamentals of investment grade energy credits have improved dramatically since 2015/2016 as management teams have aggressively cut capital expenditures, suspended dividends and sold assets in order to reduce leverage and improve their balance sheets.