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In a doomsday scenario, Goldman Sachs (NYSE: GS ) projects oil prices may nosedive all the way to $20. Financial and fundamental metrics are said to be weaker this year and a glut in global production may drag oil prices lower. While a doomsday scenario will see oil plunge to $20, the official projection for WTI in 2016 is $45, down from a prior estimate of $57. For 2017, Goldman left the projection unchanged at $60. Last Wednesday, the Energy Information Administration (EIA) reported that the US commercial crude oil inventories dropped 2.1 million barrels for the week ending Sep 11 from the previous week to 455.9 million barrels. US commercial crude oil had increased 2.6 million barrels in the week prior. This encouraging report boosted energy shares. However, these are momentary respites for the crude prices, as they may continue to remain low. For the short term, oil prices may remain muted. A radical slump may not be seen in the short term, as there’s hope that geopolitical news doesn’t act as the igniter. Bearishness will persist though, as it is unlikely that there will be a consistent sharp decline in US shale oil production. Also for oil prices to bounce sharply higher, the OPEC nations would need to cooperate with non-OPEC producers to cut production. In spite of soft pricing, U.S. shale producers and OPEC continue to produce more of the commodity for fear of losing their market share. Most importantly, when the energy market had pushed the cartel to cut output last November, it had clearly refrained from doing so. The $20 Doldrum A decade ago, Goldman projected that oil prices have entered the “super spike” period and that the price of oil would inflate to $105. This was proved right, though the prediction had sparked criticism that Goldman Sachs was marketing its commodity index fund. This time with a $20 prediction for the worst-case scenario, even those criticisms will not make sense. When crude prices were hovering significantly over $100, it must have sounded strange to predict its fall to $40 in a year. But it did happen. Goldman says that there is less than a 50% chance of oil dropping to the $20 figure. The glut or global oversupply of oil is larger than what Goldman had predicted earlier. Below $20, some U.S. shale-oil producers will not be able to recover their operating cost and will eventually be forced to stop pumping. Production Cut Most Wanted A production cut from the U.S. shale players is most needed. The International Energy Agency (IEA) is anticipating U.S. oil production to decrease by 400,000 barrels a day in 2016 as the shale players might soon slip on low crude prices. Most importantly, the declining U.S. oil production trend has already started this year. This was revealed in the short-term energy outlook of the Energy Information Administration (EIA) which provides official energy statistics from the U.S. government. Per this outlook, August oil production declined by 140,000 barrels a day from the prior month. Energy Funds to Sell For risk-averse investors who are cautious of this sector, we present 3 Energy funds below that carry either a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell) as we expect these funds to underperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. The minimum initial investment for these funds is within $5000. The BlackRock Energy & Resources Portfolio A (MUTF: SSGRX ) seeks capital appreciation over the long run. SSGRX invests a lion’s share of its assets in small cap companies related to sectors including energy, natural resources and utilities. SSGRX has no limit on number of companies it can invest in, but it will invest in a minimum of three countries. SSGRX currently carries a Zacks Mutual Fund Rank #4. The year-to-date and 1-year losses are 26.2% and 47.5%. The 3 and 5-year annualized losses now stand at 15.3% and 8.3%. Annual expense ratio of 1.31% is lower than the category average of 1.45%, but SSGRX carries a front end sales load of 5.25%. The BlackRock All-Cap Energy & Resources Portfolio A (MUTF: BACAX ) seeks capital appreciation over the long term. BACAX invests a majority of its assets in domestic and foreign natural resources and energy companies. BACAX may also invest in related businesses and utilities. However, a minimum of 25% of its assets must be invested in the energy sector. BACAX currently carries a Zacks Mutual Fund Rank #4. The year-to-date and 1-year losses are 24.2% and 38%. The 3 and 5-year annualized losses now stand at 9.2% and 4.6%. Annual expense ratio of 1.38% is lower than the category average of 1.45%, but SSGRX carries a front end sales load of 5.25%. The Rydex Energy Services Fund A (MUTF: RYESX ) seeks growth of capital. The fund invests a majority of its assets in equities of small to mid-cap Energy Services Companies that are domestically traded. It also invests in derivatives. The fund may also buy American Depositary Receipts for exposure to non-Us energy companies. RYESX currently carries a Zacks Mutual Fund Rank #4. The year-to-date and 1-year losses are 25.3% and 48.5%. The 3 and 5-year annualized losses now stand at 15.3% and 5%. Annual expense ratio of 1.6% is lower than the category average of 1.45%, but RYESX carries a front end sales load of 4.75%. The Ivy Global Natural Resources Fund A (MUTF: IGNAX ) seeks capital appreciation. It invests heavily in equity securities of companies across the globe, whose primary operations are related to natural resources, including suppliers and service providers. A minimum of 65% of its assets are invested in a minimum of three countries and may include domestic firms. IGNAX currently carries a Zacks Mutual Fund Rank #5. The year-to-date and 1-year losses are 14.6% and 32.2%. The 3 and 5-year annualized losses now stand at 8.1% and 4.5%. Annual expense ratio of 1.57% is higher than the category average of 1.42%, and IGNAX carries a front end sales load of 5.75%. Link to the original post on Zacks.com Scalper1 News
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