April was the cruellest month for oil prices this year. During that month, crude prices fell to their lowest level in more than four years after President Donald Trump unveiled his “America first” tariff policy.
The steep reciprocal tariffs induced fears of a sharp slowdown in global growth, casting a shadow over crude demand. Oil prices recovered slightly in the latter part of April after Trump paused the higher tariffs for 90 days. However, prices revisited the April lows in May following an OPEC+ agreement to ramp up output.
Energy credits were hit the hardest by the steep fall in oil prices in April and May, trading as if a severe recession was a certainty, even as credits in other sectors rebounded on a market view that “Taco” Trump would back down from his more extreme pronouncements to avoid recession and market crash. This divergence didn’t make sense to us and helped to inform us that the energy sector was cheap on a relative basis.
Brent Crude
We also believed that crude prices wouldn’t remain severely depressed for a prolonged period, because a long-drawn slump would have made it uneconomical for marginal producers to sustain output, ultimately leading to a recovery in oil prices. This inherent tension between supply and demand is why commodity markets tend to balance themselves out in the medium to long term – with a strong reversion to the mean price tendency that markets tend to overlook at pessimistic and optimistic extremes. These factors encouraged us to take a contrarian and more positive view on our energy exposure.
As with any contrarian view, timing the market turn is difficult, and therefore we ensured the energy names we selected had a solid credit profile, with the resilience to withstand a long period of low oil prices.
Market sentiment towards energy has improved materially from the lows after “Liberation Day”. By combining robust top-down macro risk assessment with bottom-up credit analysis, we gained confidence to take a contrarian position in a moment of market stress. As mentioned, our selection process is predicated on thorough credit analysis and research, paying close attention to our portfolio companies’ liquidity, leverage and free cash flow generation. We also take into account the relative value of the bonds that we hold in comparison to peers.
The value of active minds: independent thinking
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