Oil may be the biggest risk for 2016

Oil prices

Oil may be the biggest risk for 2016

The major financial risk in 2016 may be the one that’s been in discussion all year round.

In the popular Christmas pantomime shows in Britain, the audiences shout, “He’s behind you!” as a caution to the hero when the villain appears.That refrain is nearly perceptible as investment strategists scrutinize 2016 for risk events, as the well-known villains of plunging oil prices re-emerge from behind the curtain.

It is now so common, however, it is difficult to record a further decline in oil prices as a “new” risk.

Financial markets have lived with the consequences of deflation energy since mid-2014, and it still remains with the same pressure. The idea of another upset of this magnitude is unnerving to say the least.

A debt of almost $2 trillion has been sold by energy and mining sectors since 2010, who are facing a wave of credit downgrade, and defaults are also on the rise.

The results on inflation forecasts of another sustained fall in oil prices have been alarming, both for central banks to tighten, as the Federal Reserve, and those who are still relieved as the ECB.

Since June 2014, Brent crude has fallen 65 percent, from $115 to $40 per barrel. Much of this breakdown happened in the last six months of last year, but there are hopes for a recovery this year amid a toxic mix of excess supply and sharp demand slowdown in China and emerging markets players.

The prospect of living with oil prices — even if they remainsteadyand do not recover toleast $60 —will be a big challenge for many companies and exposed economies, as they prepare for next week’s rise in U.S. interest rates.

Furthermore, after the OPEC meeting ended last week in disarray without any agreement on supply cuts or even a reference to the production caps, oil prices have given rise again.

Brent has measured new lows below $40 a barrel this week while U.S. crude fell below $37. Even the average annual rolling price, at less than $55, has come just half in 18 months and continues declining.


Long-term oil price bears Goldman Sachs to deem that any consideration of a bounce back or even stabilization in 2016 are unusual, and U.S. crude could drop almost 50 percent from here to $20.

“There is a danger that a mild winter, a slower growth of EM and the (potential) lifting of international sanctions on Iran cause inventories continue to build,” the bank told customers this week. “These factors mean that near-term risks to the prediction remain on the downside. By breaking oil prices and logistics of storage capacities, they hope oil prices could drop to production costs as minimum as $20/bbl.”

If that proved right, it would draw out another strand in this year’s already hectic market.New investments in global equities, real estate, and bonds operated from oil-fueled sovereign wealth funds are drying up with reports of withdrawals of billions of dollars by state institutions to private asset management.

The foreign assets of the Saudi Arabian Monetary Agency alone are dwindling at a rate of more than $120 billion annually. The blend of lower-for-longer oil and higher actual rates could be deadly for corporate credit and rising markets.

Predicting a rise in oil and the mining sector next year, the rating firms of Moody said these delays in 2015 were only a temporary damper in the hedging programs, agreements, and rundown of existing cash balances.

But all that could change if oil prices don’t recoup or even fall further.

“The decline in liquidity and limited access to capital markets are now pushing more companies closer to default,” Daniel Gates, Managing Director of Moody, said last week.

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