By Vikram Rangala Monday, February 22, - Those funds were created during times when oil revenues brought huge surpluses of cash to countries in the oil-rich Persian Gulf region as well as Russia and Norway. Those funds were diversified and included commodities like oil itself, as well as shares of blue-chip companies, not to mention assets like luxury homes and hotels and FIFA soccer teams.
With oil in a slump, stocks are now their most saleable asset as well as the best performing part of their portfolio now that equities are rallying again.
Except, of course, shares of energy companies, which continue to struggle. Shale oil drillers in North America, for example, are just one multi-dollar drop in crude prices away from insolvency. The latest reports show the US rig count down after continued expansion in Production of shale oil is also down. While the IEA still expects US shale production to rebound in , these developments must have the Saudis feeling that their strategy of driving down costs to drive out shale oil competition is working.
Another sector feeling the effects of the oil slump and uncertainty is finance. Financial stocks are in a slump for several reasons related to larger concerns about the global economy as well as worries about interest rates. One of the riskiest exposures of many large financial firms is energy-industry debt. Big banks have loaned a lot of money to shale oil drillers who now are unable to make their payments and look very close to going bankrupt. If that happens, those banks face even more trouble.
So if oil is risky business for big banks and the sovereign wealth funds of oil producers themselves, it ought to have individuals with small investment accounts, especially young people, scared to touch it, right?
And to make it even more of a bad bet, it continually switches to the newest front-month oil futures contract, incurring roll costs at every repurchase. You get all the fun of an over-leveraged investment, combined with the security of a really shady junk bond, wrapped up in needless fees. You just get a limited risk way to trade even one of the most risky markets. In addition to the disclaimer below, the material on this page does not contain an offer of, or solicitation for, a transaction in any financial instrument.
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