Report Scale matters: navigating EM oil credit in volatile markets

As we all know, the ongoing conflict in the Middle East has significantly disrupted the global oil supply – and this has been reflected in pricing.

A barrel of Brent crude rose from around US$70 prior to the conflict, to a brief multi-year high of US$126 in late April and is at US$109 as of 15 May. Given this level of volatility, it’s not a surprise that investors are asking the question: what happens from here?

For investors in emerging market (EM) debt, one of the key concerns is how the conflict is affecting the operational competitiveness of corporate issuers and oil producers in particular. Our view is that understanding the vastly differing characteristics of EM oil industry participants is one way of identifying potential opportunities in this space.

For a true sense of the stresses in the oil markets, we have preferred to focus on the dated Brent prices (for immediate delivery), as opposed to the futures price, even if the ranges for both have been similar recently.

This is because fluctuating prices create opportunities and challenges for the global oil industry. Specifically, oil credits are highly exposed to changes in the price of Brent, resulting in periods of induced commodity price volatility. Such a characteristic, however, results in different market treatments between small-to-medium-scale oil exploration and production companies and larger operators within the sector.

For professional investors only. Capital at risk.