The U.S. energy sector has been in flux over the last few years, as oil prices drop dramatically and investors borrow heavily to try and keep the market out of free fall. This has made energy risky for the U.S. and other markets, with economists and regulators warning about rockier roads ahead and cautioning the public about the hazards it could pose to the economy.
"The price of oil has risen from the 12 year low."
"The fundamentals are still that growth is very slow in many parts of the world and companies – particularly non-financial corporates here and in some emerging markets – have taken on more risk," Office of Financial Research director Richard Berner told the Reuters Financial Regulation Summit. Berner points to the drop in recovered defaulted debt in the first quarter of this year, saying that energy remains a high-risk investment in spite of slowly climbing oil prices.
"The cash flows that they now can expect are better than when oil was, you know, 25 bucks for a short period of time, so that's a lot better," he said. "But the fact is that the debt didn't go away."
The price of oil has risen from the 12-year low of $25 a barrel last year to the present $50. Yet, as Berner alludes, the market has along the way has struggled to stabilize, which in turn has led – in the words of Bloomberg writer Lisa Abramowicz – to the return of junk bonds.
Rising popularity, in spite of risk
With oil prices stabilizing, investors are once again looking to energy junk bonds to bolster portfolios. In spite of the 23 percent tumble the bond market took in the last few months of 2015, investor confidence remains high, demanding the smallest premium relative to the broader index since last August for the high-risk, high-yield bonds.
Wall Street, however, remains wary of the energy risk. Bloomberg Intelligence analyst Spencer Cutter reports that Wall Street banks have scaled back their lending to energy companies this year by about 19 percent. This strategy seems to be driven by the continued pessimism regarding the anticipated rise of corporate default across all markets, as well as worries about the slow growth – or possible plateau – of oil prices.
"It's better to plan for $60 and let the people who want to hope for $100, hope for $100," Norway's petroleum and energy minister Tord Lien told Bloomberg. "We saw oil prices hitting $140 a barrel, and that does not contribute to economic growth. So therefore I'm not hoping for it."
With higher prices seemingly gone for the foreseeable future, the amount of debt the energy market has taken on has many saying it might be untenable. Bond buyers looking for a quick fix to shore up against default are cautioned to take a better look at the risks associated with their investments.
