Monday Musings: January 6, 2020

Jan 06, 2020


Public Trust Credit Team
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Crude oil in the Middle East: noise and threats more frightening than the fundamental impact on the market

Following the U.S. drone strike killing of Iranian General Qassem Soleimani, worldwide equity futures declined and oil price jumped 3% overnight. Currently, Brent oil is nearing $70 per barrel, up from about $66 per barrel at the close on Thursday, January 2. While the action generated substantial media coverage, so far it has had little impact on the credit markets. Fifteen high-grade, private sector borrowers issued on Monday and current projections for January’s issuance level are 9% higher than of the same time last year (per JP Morgan). Similarly, uncertainty appears to be far more concerning than any actual impact on crude oil prices. The so-called “majors” in the oil market are fully integrated, giving their overall business a natural hedge because they generate cash from both upstream (puling hydrocarbons out of the ground) and downstream (processing hydrocarbons for sale to consumers). Additionally, hedges help the companies control their costs for crude oil. As a result, the Credit Team sees minimal risk to the sector at the present time but anticipates continued volatility as the Iranian government threatens retaliation and potentially acts on these threats.

Several years of severe droughts have created optimal wildfire conditions in Australia as unprecedented flames have engulfed the country for the past two months

Since the fires first began in early November of 2019, flames have destroyed more than 23,000 square miles of land with the regions of southern New South Wales and eastern Victoria being the most heavily affected. So far, insurance claims have reached an excess of $260 million, but the full economic impact to Australia will be far greater than just insurance losses. Thousands of acres of farmland have already been destroyed, which will have a particularly crippling impact on the both country’s agriculture sector and tourism industry (currently in peak season). According to an article from the Wall Street Journal, a research assistant with the National Aeronautics and Space Administration estimates that the fires in New South Wales alone have emitted 260 million tons of carbon dioxide from August through December 2019, roughly half of the country’s typical annual greenhouse-gas emissions. Environmentalists are urging PM Scott Morrison to implement stricter government climate policies in the face of the unprecedented devastation that will prove challenging given the Australian economy’s heavy reliance on coal extraction.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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