If Countries Made Rich By Oil Are Abandoning It, Should You Be Holding Oil Stocks?

November 25, 2017

Norway made headlines this week when they announced that they would divest their holdings in oil stocks from their sovereign wealth fund. This follows the move to divest from coal stocks, in an attempt to protect the fund from climate risks. If the world’s largest fund is no longer investing in oil companies, should individual investors look to do similar?

From Bloomberg:

Norway, which relies on oil and gas for about a fifth of economic output, would be less vulnerable to declining crude prices without its fund investing in the industry, the central bank said Thursday. The divestment would mark the second major step in scrubbing the world’s biggest wealth fund of climate risk, after it sold most of its coal stocks.”

It’s quite the turnaround, considering that oil made the country rich after it was discovered off their coast in 1969. The story of how they invested the proceeds and built the world’s largest wealth fund in the process is a lesson in how resource rich nations like Australia and Canada could have secured their financial future, but that’s for another day.

Should you consider divesting oil equities from your portfolio?

While there’s obvious difference between a $trillion sovereign fund and your own portfolio, some lessons can be learned. Firstly, there’s the environmental argument against carbon based energy. Aside from an ethical standpoint, there’s also questions of falling demand and new energy sources taking market share from oil. Secondly, as Norway points out, there’s volatility linked to the oil price. With the path of oil unclear, an investment in an oil company puts some volatility into your portfolio, no matter how well the company hedges its exposure.

So, does the upside potential outweigh those factors? That’s a question that every trader and investor needs to answer for themselves. Oil stocks seem to have their glory days behind them, but if the price of oil rises to $100 a barrel in 2018 you can be sure that the energy sector will be going along the the ride.