On December 11, 2014, spot WTI closed at $60.01, down sharply from $76.52 the week before that Thanksgiving. In the space of only a few weeks, oil prices had collapsed far more than anyone thought possible; and yet there was very little urgency to the outcome. Economists, in particular, parroted throughout the media, were quick to assert both a supply “glut” as well as how very beneficial low oil prices were in macro terms for consumers. Paradoxically, Janet Yellen’s increasing use of the word “transitory” meant that on one side the decline in oil prices wasn’t meant to last even though on the other that meant the consumer “benefit” would not either. Thus, in orthodox terms it was better that oil prices would return to oppressive levels and therefore any consumer aid was just the silver lining for the interim.
The word “transitory” would define, then, not just oil prices themselves but an entire array of market balances and economic interpretations that come from oil being the economic center of even a services economy. In terms of assets, junk and high yield corporates were uniquely bombarded by the “unexpected” oil crash, leaving many investors to lighten up in what was a great shift in probabilities and perceptions – better to sell a little just in case Yellen got it wrong.
Even though oil fell below $50 spot WTI as soon as January 6, 2015, and then even flirted with the $30’s not long after, by the middle of the year WTI was back above $55 and even intermittently in the very low $60s. For many, far too many, that seemed as if Yellen had it right and that junk bonds were being overly cautious even when the prior year’s selloff (to December 16) was being limited in commentary to just the oil sector. By mid-year, oil and gas were back within the dominant narrative:
Fear has given way to greed in risky US energy bonds. After last year’s oil crash pummelled the US energy industry and sparked fears over a slew of corporate defaults, yield-hungry investors have returned to pick up bargains from the detritus.
As oil prices stabilised around the $50 per barrel mark, and prospective returns on other corporate debt — let alone government bonds — have remained paltry, investors have become somewhat more positive.
That was published in April and contained, despite the more optimistic tone, a rather stark warning about those probability distributions that were tested at the outset of this year:
While US junk bonds are on the whole attractive, “energy bonds still look too rich”, argues James Swanson, chief investment strategist at MFS, which manages about $445bn. “Many of these companies cannot outlive a two-year bear market [in oil].”
As with macro themes, the narrative would shift only in the smallest possible increments. In the middle of 2014 there was nothing but clear sailing for anything and everything; by the start of 2015, it was still a great environment but now with a little trouble limited to the oil and gas sector. Despite everything that has occurred since then, that remains the conventional association of junk and corporate debt that gets more and more pummeled by the day – don’t worry, it’s only oil.
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