The energy crisis is making front page news in the UK and elsewhere around the world. What is going on? Most importantly, what opportunities and risks does the energy crisis present for investors?
Although the energy crisis is acute in the UK, it is critical to appreciate this is a global crisis. The world’s major industrial giants including the EU, the USA and China are all experiencing a rapid upward acceleration of energy commodity prices.
Relative to average 2020 prices, global oil prices, UK natural gas prices and global coal prices are up 1.8 times, 6.6 times and 3.3 times, respectively. Why?
Commodity price dynamics are driven by supply and demand. There has been a lack of investment in the oil, natural gas and coal sectors, which has limited the supply of those commodities. At the same time, demand for those commodities is rising.
Were renewables not supposed to fill the gap? Yes, they were. However, in practice there have been challenges for the energy sector as a whole to adequately ensure markets are sufficiently supplied with affordable energy.
The result: high energy prices and limited energy supply relative to demand.
We believe that the energy crisis will have implications on the economy at home and globally, the consequences of which are not fully known. It is a relatively safe bet that the energy crisis will have the effect of increasing inflationary pressures, while potentially also restraining economic growth.
As ever, many challenges are associated with opportunities and we see investments in the energy sector that can provide tangible solutions that alleviate stresses caused by the energy shortage as representing potentially compelling investment opportunities.
In the past, many investors may have invested in the major European energy behemoths to gain satisfactory exposure the sector. Today, many investors are confounded by the increased complexity of those companies, most of which are now perceived to be investing in renewable energy in a context where, some believe, coal, oil and natural gas are still required to carry the ball – as commodity price markets suggest. Therefore, for many, gaining satisfactory exposure to the dynamics that are unfolding in the energy sector can be a challenge.
Smaller energy companies often allow more precisely focused energy market exposure and clear investment rationales, but are associated with smaller company risks.
Combined with these challenges, almost all investors today are prioritising environmental, governmental and social considerations – commonly referred to as ESG considerations. Many investors do not want to promote the growth in supply of coal, oil and natural gas due to the carbon dioxide they emit. On the other hand, some investors are recognising the “S” in ESG and believe that, for now, our economies are dependent on carbon emitting forms of energy. As the energy crisis unfolds, it is very possible that perceptions and attitudes related to the energy sector will evolve.
In this context, there is no silver bullet solution to the energy crisis nor is there a one size fits all solution to portfolio management in this context of challenge and opportunity.
We do believe that the energy crisis is real and probably gathering pace rather than dissipating. We encourage interested investors to discuss the energy crisis with their investment advisers to assess what it could mean in terms of both risks and opportunities.
Sources: Capital IQ