In December, we wrote a post saying high leverage in emerging market debt and repercussions of lower oil price are the two biggest risks in 2016. Since the beginning of the year, both have proven to be quite decisive in determining the fate of financial markets.

However we feel, extent of repercussions are yet to be felt by financial markets and we guess it would slowly come to the picture going ahead.

Key argument in this theory are Petro-Dollars, which have largely evaporated from financial markets, with drop in oil price.

Why Petro-Dollar matters?

Since the summer of 2014, global reserves are likely to decline by trillion Dollar by first quarter of 2016 and that is largely due to lower price. Historically oil producing economies have played key role in forming reserves.

About a decade ago, 70% contribution to global reserves used to come from oil and gas revenue, which has fallen since but still contribute about 60%. So Petro-Dollar revenue has been major contributor to global reserves viz. a viz. Sovereign Wealth Fund.

Since financial crisis of 2009, from 2010 to 2014, these SWF assets ballooned from $3 trillion to double $6 trillion. Going by the calculations, energy revenue contributed to almost $2 trillion to these funds. Which in turn means about $670 billion or so has flown global assets mainly fixed income every year.

Now, with drop So, key financial lubricant, asset purchases has been disappearing since mid-2014 and in 2016, these reserve contributions are likely to reverse in net position. We, expect, energy and commodity SWFs to lead way in reduction.

List of largest commodity SWFs of the world -

• Norway - $835 billion
• Saudi Arabia - $773 billion
• United Arab Emirates - $773 billion
• Qatar - $256 billion
• Australia - $90.8 billion
• Chile - $22.7 billion
• Canada - $17.7 billion