Of all the global risk sources at the tail end of 2017, a sudden oil price shock arguably poses the greatest risk to institutional portfolios both in terms of its likelihood and the severity of impact. But perhaps the most troublesome factor is the complacency or lack of attention towards this risk; if anything, investors’ concern is over sharply lower oil prices.

The reasons for complacency could be traced to the widespread belief that the days of significance of oil as key commodity are numbered, and that we have already seen the beginning of marginalization of oil as energy source. The reality cannot be farther from the truth:
  • the world is using more oil than ever before,
  • electrification of transport will not matter at least until 2025,
  • traditional oil producers have underinvested,
  • shale oil producers face limits to productivity gains.

All of the above prompted us to carry out a 75% price hike scenario analysis using LINKS Mira ABM. Our conclusion is that the resulting environment will be toxic for fixed income instruments due to the inflationary pressure, but there will be bright spots to hedge with.

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