Last year there was an acceleration of the energy transition as the war in Ukraine prompted governments to fundamentally reassess how they source and use energy.
Russia’s invasion of Ukraine had a deeply disruptive impact on energy markets in 2022: it highlighted the world’s continued dependence on fossil fuels, but also galvanized investment in energy sources. alternative energy as countries faced the need for energy independence. This “reshaping” of energy markets is likely to be a major feature of energy markets in 2023.
The immediate vacuum left by Russian sanctions forced European governments to find new sources of short-term supply. Liquefied natural gas (LNG) has proven to be a temporary solution, with countries also re-igniting coal-fired power plants. Pressure in major energy markets eased as natural gas and crude oil prices fell in the second half of the year.
Nonetheless, in our view, prices are unlikely to fall significantly, even if the recession hits. This is particularly evident in the oil market. OPEC’s announcement of reduced production targets in October demonstrates a desire to be more responsive in managing oil prices. This should support prices amid economic uncertainty.
For energy companies, this should make them more defensive in the coming year. The US administration’s announcement that it will buy oil at prices below $72 also puts a floor under oil prices.
Rising oil prices have not yet resulted in a noticeable decline in global demand. Demand has remained relatively high and could increase further as China changes its zero Covid policy. Nevertheless, rising interest rates and recession in most major economies could weaken demand, as could high prices.
Oil supplies remain tight. The past decade has seen relatively little investment in new oil production, with the exception of US shale oil. The balance sheets of energy companies are much stronger today than during past recessions, once notorious for excessive spending.
Investors encouraged capital discipline in the sector, which should put an end to the runaway growth of US shale. Many energy companies have pledged to return free cash flow to shareholders rather than revert to maximizing production. This means that supply should remain tight, while demand continues to increase.
sustainable energy
New government commitments to sustainable energy generation have been a key part of 2022. Governments around the world have committed significant capital to commissioning green energy sources through the EU Green Deal and the recent REPowerEU in Europe; in China for the adoption of wind, solar and electric vehicles and in the United States via the law on the reduction of inflation.
This is unlikely to diminish in 2023, with three powerful factors at play: supportive regulation and policies; a new impetus for energy security and independence; and the cost. On this last point, traditional energy prices are now expected to stay higher for longer, making sustainable energy sources more competitive.
Renewable energy costs for solar panels and onshore wind now represent the most economical technology choice for power generation in many markets, driving rapid adoption.
Other areas of alternative energy distribution and storage are also becoming more competitive as economies of scale develop. This is evident in areas such as energy storage solutions in automotive electrification, where the transition to electric is driving increased EV adoption.
The transition to a low-carbon economy is a decades-long phenomenon and will prove disruptive to many sectors and business models, while creating significant opportunities for companies on the right side of change.
The sums involved are staggering, the International Energy Agency estimates that annual investment in clean energy will need to more than double to $4 billion by 2030. That puts a lot of money in motion.
Investment consequences?
BlackRock Energy and Resources investment trust is positioned to seize opportunities in a changing energy market. We believe the scale of the growth opportunity for the sustainable energy sector as a whole over the next few years has been underestimated both as a play on capital allocation and attractive exposure. long-term investments.
However, the transition will also affect traditional energy providers. Looking ahead to the year, sentiment favors higher quality oil producers, who we believe will benefit the most from a stronger longer-term oil and gas price environment, a sector potentially resurgent oil services and the increased need for liquefied natural gas (or LNG) to replace Russian gas exports to Europe.
We retain the flexibility to shift the portfolio between sustainable and legacy power generation depending on the environment. This year has been crucial for energy producers and 2023 promises to be just as exciting.
Mark Hume, co-manager of BlackRock Energy and Resources Income Trust. The opinions expressed above should not be considered investment advice.
