Monday Musings: July 6, 2021

Jul 06, 2021

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Public Trust Credit Team
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OPEC+ members fail to meet agreement on production levels

The Organization of the Petroleum Exporting Countries and its allies, including Russia (OPEC+), called off a meeting scheduled for July 5 after failing to secure an agreement on increasing oil supplies to meet improved global demand. The organization had sought to progressively increase production each month by 400k barrels per day through the end of the year thereby winding down the 10m barrel per day cuts the group agreed to during the depths of the pandemic and oil fallout last year. With production possibly remaining untouched and an uptick in demand, market participants anticipate a tighter market during the second half of the year.

 

Brent Crude, the international benchmark, hit $77.84 per barrel on Tuesday while West Texas Intermediate reached $76.98, a mark not seen since November of 2014. The spike in demand due to easing COVID-19 restrictions has translated into higher fuel prices at the pumps across the U.S. According to AAA, the average price for a gallon of gasoline was $3.12 last Thursday, the highest gas price in almost seven years. Given the prior year of lockdowns and travel restrictions, many market analysts do not anticipate these higher prices to abate any time soon as Americans aim to get back on the road. The notion of transitory inflationary factors could be at risk should oil prices continue to rise or remain elevated through the rest of 2021.

BoA projects higher M&A volume and potentially lower IG issuance volume

As a result of news flow, July and August often see a slow down in Wall Street activity so many investment banks’ research teams often publish thematic or think pieces. On Friday, Bank of America’s Credit Market Strategy team published a piece titled Forecasting Supply is Difficult, Especially When it Involves the Future in which they suggested that though M&A deal volume is expected to increase in the second half of 2021, there surprisingly won’t be a commensurate increase in IG deal volume. The disconnect stems from companies sitting on piles of cash from recent issuance while refinancing debt at historically low levels paired with the typical lag between deal announcement and bond issuance of about 7-8 months. Because of this, the incremental additions will be in 2022 with M&A deals likely slowing as we approach the Fed’s expected action on rates in 2023.

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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