Iran deal was already priced in to markets
The sanctions relief deal with Iran had been expected by the market and was largely already priced in, according to NN Investment Partners (NN IP).
Tim Dowling, head of Credit Investments and lead portfolio manager Global High Yield at NN Investment Partners, commented: “Most observers see the deal with Iran adding up to an additional 1% of global production but not for at least a year. Additionally, we note that other geopolitical concerns impact the price of oil, and that many oil producing countries are experiencing or could experience significant social unrest to the point of war.”
However, Dowling says the sharp drop in the oil price in the second half of 2014 has had serious consequences. He added: “Shale oil producers have drastically cut capital expenditures while the oil majors have cancelled expensive projects. The structure of the oil market has fundamentally changed. We see defaults in the energy sector increasing in the coming years, but with the spread of the global high-yield benchmark well over 4% and many troubled bonds trading near recovery value, we think the impact of these defaults will not be enormous and still allow for good high-yield performance.”
NN IP expects that increasing demand for oil will catch up with flattening supply, leading to higher prices. It says the current gap between supply and demand is generally estimated at 1 to 2%. NN IP does not expect oil to rebound to $100 a barrel, but believes that the closing of the supply and demand gap will lead to prices significantly higher than they are today.
With US shale now being the world’s marginal production and the oil majors unable to profitably execute the expensive projects they have historically done, NN IP also sees mergers and acquisition (M&A) activity increasing this year.
The NN IP Global High Yield Strategy is currently less than 1% overweight the energy sector, which constitutes 10.56% of its benchmark.