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The worst configuration since the 1930s for the oil market

09 March 2020

This commentary is intended for professional investors only within the meaning of MiFID II.

At the time of writing, the price of oil is down -18% since Friday’s close and following the decision of Saudi Arabia to start an oil-price war.

In terms of demand / supply chock, this is maybe the worst configuration for the oil market since the 1930s. The IEA said today that there is already a surplus of about 3.6 million barrels a day and we estimate this oversupply could rise to more than 5 million barrels a day during the second quarter.
Consequences: 

  • Very negative for shale oil producers in the US; we estimate their breakeven price to be between $45 and $50. The December 2020 future is currently trading at $37, meaning that most producers will not be able to survive should the price remain close to those levels. Consequently, this is also very negative for US high Yield with US High Yield Energy companies representing around 12% of the segment.
  • Very negative for break-even inflation expectations obviously.
  • Very positive for G7 bonds: This is one of the main reasons of the sudden drop is G7 rates today.

Over the medium-term, we can also see some positive effects, especially for European countries importing most of their oil consumption.
 

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