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Persian Gulf war impact on US energy credit spreads

William Hong, Senior High Yield Credit Analyst

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The Persian Gulf conflict is reinforcing the pressure geopolitical instability places on credit markets, with concerns spanning supply, cost and demand shocks, risk-off repricings, and ​​​​​​ increased restraint in dealmaking.

Markets have already felt the consequences — specifically the closure of the Strait of Hormuz — across numerous sectors, from shipping and logistics to travel, chemicals, and automotives.

Octus’ U.S. High Yield Credit Research team has been investigating what the effects of this conflict may look like across the board, and especially the impacts on the U.S. oil & gas sub-sectors. Our expectations, ranked from most positive to least:

  • Crude oil E&P: Marginal spread tightening in the short term as companies capitalize on higher oil prices to support free cash flow generation and de-leveraging. Material spread tightening is contingent on a prolonged conflict, however.
  • Natural gas E&P: Comparatively less benefit than oil E&P, since domestic pricing is less connected to global benchmarks.
  • Natural gas and LNG midstream: Marginal spread tightening, as spreads were already tight pre-conflict and volume upside is limited by hard capacity constraints on U.S. LNG exports.
  • Crude oil refining: Material spread widening as tightening crack spreads directly pressure profitability.
  • International oilfield services and offshore drillers: Considerable spread widening, especially for companies with direct Middle East exposure.

As this conflict and its market impact continue to develop, Octus will be covering the macro- and micro-level implications. In the meantime, if you have any questions about individual companies or sectors overall, you can reach out directly.

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