The huge sell-off in crude oil this week is raising concerns about possible hedge fund losses. Are commodities across the board headed for another Amarenth-style debacle? Howard Simons of Bianco Research and Kyle Cooper of IAF Advisors were on “Closing Bell” to discuss the repercussions of a further decline in commodities.
Neither analyst was too worried that any substantial price drop in oil or any other commodity could seriously affect the broad-based market. Simons said there are always winners and losers on both sides – and while some funds are taking big hits from the oil decline, others are profiting. Cooper agrees: “For every long, there’s a short” – in any market.
Simons also says the energy sector can never be overallocated, so there’s never reason to worry about too much investment. It is not only the largest sector in the S&P 500, but also the majority of the benchmark Goldman Sachs commodity index. And Cooper notes that there certainly has been no shortage of participation across the commodity board – especially in oil. Both men agree there is ample liquidity to go around, and any broader sell-off will likely be “well-contained.”
Simons does give a bit of investing advice. He says with oil it is better to stay away from the production-side firms as producers cannot replace reserves or acquire new ones. The service and equipment sides, however, have more room to grow.
There is no question about the volatility in oil right now – and Cooper says prices could go up anytime due to weather or a supply disruption. “We’re only one truck bomb away from much higher prices,” he says.