- Crude oil prices remain highly volatile due to concerns about global growth and continuing high production levels by OPEC and non‐OPEC producers.
- While we believe it will take more time for the global oil market to return to equilibrium, evidence has started to emerge that low oil prices are beginning to impact U.S. oil production.
- On a day‐to‐day basis, oil prices are being whipsawed by U.S. data that show occasionally larger than expected increases in oil inventories. Unfortunately, the market appears to be missing the forest for the trees as overall U.S. oil inventories are now trending lower after peaking in April (Exhibit 1).
- Low oil prices have resulted in a dramatic drop in capital spending by oil producers that is finally starting to impact overall U.S. oil production, which has declined by almost 400,000 barrels/day since early June (Exhibit 2).
The main driver affecting the performance of the rate reset securities, which comprises the majority of the Index, has been the low interest rate environment as the 5-year Government of Canada bond yield acts as a base rate when rate reset securities adjust their dividend rate. Hence, the low rate environment has put price pressure on this type of security.
Additionally, there seems to be a misconception that a rising interest rate environment will negatively impact the prices of rate resets, when in reality the opposite is true and higher underlying yields will be beneficial for the price of both rate reset and floating rate preferred shares.