Oil Rally, Dol­lar Drop Trig­gered Risk-on Trade: CLSA’s Wood

The Economic Times - - Markets: Beating Volatility - Biswa­jit.Baruah @times­group.com

Mum­bai: Christo­pher Wood, man­ag­ing di­rec­tor and chief strate­gist of Hong Kong-based bro­ker­age and in­vest­ment bank CLSA, said the rally in crude oil prices and weak­en­ing of US dol­lar have been in­stru­men­tal in ef­fect­ing a tran­si­tion from ‘riskoff ’ trade to ‘risk-on’ trade since mid-Fe­bru­ary. Risk-on, risk-off refers to in­vestor be­hav­iour and their will­ing­ness to take risk. Pe­ri­ods of per­ceived low fi­nan­cial risk en­cour­age in­vestors to make higher risk in­vest­ments, cre­at­ing a risk-on sit­u­a­tion.

Crude oil rally has caused dra­matic de­cline in yields in the most dis­tressed part of credit mar­kets, namely high-yield en­ergy bonds. The av­er­age yield on US high-yield en­ergy bonds peaked at 20.75% in midFe­bru­ary, and has since fallen to 11.56%, said Wood.

If crude oil prices sud­denly drop again, tak­ing most likely the rest of the com­mod­ity com­plex with it, then there is over­whelm­ing like­li­hood that the US dol­lar rally will re­sume, and the fi­nan­cial world will move back into “risk off ” trade as de­fault risk rises, be­cause there has been a 96% cor­re­la­tion be­tween the dol­lar and oil since 2013, he said.

Wood said oil in­ven­to­ries re­main high and con­tinue to rise in Amer­ica and Europe, with ris­ing stor­age ca­pac­ity util­isa- tion. US com­mer­cial crude oil in­ven­to­ries rose 10.1% to record 538.6 mil­lion bar­rels in the week ended April 15.

There were ex­pec­ta­tions of a pro­duc­tion freeze go­ing into the OPEC-Rus­sia sum­mit last week­end in Doha, which was a fail­ure. But, the fact that oil has not sold off has also en­cour­aged those who be­lieve that oil has bot­tomed on the view that the in­dus­try has started to ad­just, with US crude oil pro­duc­tion hav­ing de­clined by 6.8% from its re­cent peak of 9.61 m bar­rels per day in June 2015 to 8.95 m bar­rels per day last week, said Wood.

Nat­u­ral gas prices are now back at lev­els that pre­vailed in the 1990s, and are down by 86% from the highs of late 2005, while US shale gas pro­duc­tion has con­tin­ued to in­crease de­spite the col­lapse in prices be­cause of con­tin­u­ing fall­ing costs.

US shale gas pro­duc­tion rose 9.2% to a peak of 43.1 bil­lion cu­bic feet per day in Jan­uary, and was 42.6 bcf/d in March, ac­cord­ing to the En­ergy In­for­ma­tion Ad­min­is­tra­tion. Wood said peo­ple ex­pect­ing a steep de­cline in US shale pro­duc­tion may be dis­ap­pointed.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.