The Oil and Gas industry has had a turbulent year with weak and volatile oil prices. The November 2016 agreement between OPEC and Russia has been undermined by resurgent supply from Libya and Nigeria along with increased US shale activity. The recent Norwegian decision to remove oil stocks from their Sovereign Wealth Fund benchmark has highlighted the potential impact of electric car technology on future demand. But in the near term, renewed Middle East tensions and the ever-expanding global middle class may shift the demand-supply balance in the opposite direction.
Exhibit 1 shows the pattern of credit migrations over the 12 months to August 2017. This is based on almost 3,000 observations from the contributing IRB and CCAR-regulated banks. It shows:
• The number of upgrades and downgrades is approximately symmetric.
• The migrations from High-Yield to Investment-Grade outweigh the downgrades in the opposite direction.
• There are more downgrades than upgrades between the aa and a categories.
• Some companies have upgraded or downgraded by as many as three notches over this period.
Exhibit 1 Annual Transitions in the Oil and Gas Industry (Developed Economies)
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