Market commentary: Oil prices continue to fall, European markets gain momentum

A couple of months ago, the suggestion that oil could drop as low as $20 was unfathomable. This is becoming increasingly more likely now that crude has tipped below $30 and more market leaders are pointing towards that predicament.

Crude futures in the U.S. sank into the $20s for the first time in more than 12 years yesterday, hours after BP Plc said it would slash an additional 4,000 jobs, Petroleo Brasileiro SA cut its spending plan and Petroliam Nasional Bhd. warned that it faces several tough years.

As the world is now confronting $20 oil, the question on investors’ minds is for how long the oil market can maintain a price level below $30 and for how long can companies continue to operate at these levels. The risk of contagion is increasing within the US high yield sector, which has a significant proportion of companies operating in the energy sector.

Low prices could cause problems for U.S. oil companies with covenants that specify certain debt-to-earnings ratios or interest coverage, and will make it even harder for them to obtain financing to continue operating.

West Texas Intermediate (WTI) fell as low as $29.93 a barrel before settling at $30.44 yesterday, the lowest since December 2003. It is currently trading at $31.18 as of this writing.

Petrobras, as Brazil’s state-controlled oil producer is known, cut its five-year business plan to $98.4 billion, the latest adjustment to the original $130 billion announced last year.

The U.S. Energy Information Administration reduced its forecast for WTI prices for 2016 by 24 percent to $38.54 a barrel. In its monthly Short-Term Energy Outlook, the agency said the oil market would come back into balance in 2017. The call for oil in the $20s has grown louder. Goldman Sachs Group Inc. gave a 50 percent chance of oil falling to $20 in September and Morgan Stanley said Monday that a strong dollar could drop oil below $30.

Moving away from the energy sector, European equity markets continued its rebound this morning, with the Euro Stoxx 50 up 1.75% and all European bourses trading in the green north of 1%. This follows a rebound in Asian shares from a three-year low as European shares advanced amid speculation a selloff that erased more than $5 trillion from global equity values this year had gone too far. The panic seen in financial markets last week has receded.

In the credit space, spreads have tightened across the board, with both investment grade and high yield benefitting from the market momentum. The iTraxx Crossover broke the 350 resistance level, down 9 points to 343.94, with the Senior Financials sector leading. Grupo Isolux Corsan is again the best performer this morning followed by Astaldi SpA and ArcelorMittal. Lagging behind are Hellenic Telecommunications and UPC Holding BV.

In the sovereign space, spreads are mostly flat with the 10-year bund unchanged and peripheral countries including Italy and Spain just 1.1 bps and 2.2 bps tighter. The 10 –year US Treasury is trading slightly wider by 4bps to yield 2.144%. Yesterday US equity markets closed up around 1% across the board in a volatile session which saw a late rally after a mid-session dip.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment