For all its shock value, the collapse in the oil price earlier this year was just one chapter in a litany of unusual events in 2020. At the start of 2020, we faced an oil-price hike over Iranian-US tensions and threats of military action. To go from that to a complete collapse in the blink of an eye was extraordinary. Never has the industry had to deal with such a collapse, even as OPEC was initially increasing production.
Not long into the Covid-19 crisis, we saw markets rebound at a surprising rate as unemployment figures and economic indicators deteriorated – which may have as much to do with liquidity and central-bank activity as pure fundamentals.
Looking ahead, the pandemic is likely to create an enduring legacy. For one thing, people have learned to work from home and like it, which should lead to less commuting. Supply chains, too, are shortening, partly owing to perceived political risk but also because of an increased awareness of how vulnerable just-in-time or cheapest-cost networks are. Finally, the crisis has encouraged the adoption of ‘green’ fiscal stimulus from governments the world over. Taken together, these developments will hasten the speed of structural change away from hydrocarbons towards a more sustainable energy framework.
Expectations of peak oil demand have moved forward, and companies can no longer pretend it is a non-issue in this decade. We have seen a wave of European companies promote greater green strategies, discuss the prospect of fading out their oil production sooner, and invest to become broader energy companies. Relative to how things were before the pandemic, investors now require a higher rate of return to warrant investing in energy, resulting in the size of these companies within benchmarks shrinking.
We suspect the green energy excitement has blinded the market to some challenging realities of an energy system that is overwhelmingly hydrocarbon-based, and the influx of ESG money has certainly made it harder to uncover value. However, this is where we believe investors need deeper knowledge of company strategies and their product suites. We are moving towards a more intricate energy system, and complexity and uncertainty create opportunity.
Laura Sheehan, global research analyst, oil and gas sector, Newton Investment Management.