Page 20 - ISQ UK_October 2017

INVESTMENT STRATEGY QUARTERLY

Energy Transition Is Here to Stay

Pavel Molchanov, Director, Energy Analyst, Equity Research

As many of our readers are painfully aware, Energy had
been the worst-performing sector of the US equity market Energy transition is an irreversible megatrend – and,
in the decade prior to 2021. However, as is often the case, ultimately, more important for the Energy sector
what had seemed utterly hopeless turned out to be the than either COVID or geopolitics.
trough. From the COVID-impacted debacle of 2020, when
fundamentals (remember negative oil prices?) as well as OIL & NATURAL GAS OUTLOOK
investor sentiment hit rock-bottom, Energy ended up So, what does 2022 have in store for the oil market? Let’s first
being the best-performing sector of 2021, up 60%. This acknowledge that predicting oil prices involves, to borrow a
reflects the post-crisis rebound in the oil market, with phrase, both ‘known unknowns’ and ‘unknown unknowns.’
spot oil prices rallying 50%, and US natural gas up a sim- Demand has essentially recovered to pre-COVID levels – hence
ilar amount. That said, the oil and gas industry’s cash flow the past year’s bounce in the oil market to the highest levels since
approximately tripled in 2021, so in that sense, the stocks 2014 – and we anticipate that demand should continue to firm
didn’t do quite as well as some might have expected. The up. However, even with the global vaccination rate (one or more
doses) approaching 60%, there is no escaping the fact that pan-
lesson here is that the market is always forward looking: demic-related headwinds, especially in aviation, are still a
with the commodity futures curve pointing to price headwind for demand. On the supply side of the equation, OPEC
declines in the years ahead, the stocks are pricing in less and Russia are gradually restoring production to pre-COVID
stellar, though still solid, profitability in the future. In an levels: the only question is, how quickly this process will unfold.
even broader sense, Energy remains less than 3% of S&P Meanwhile, the ongoing nuclear negotiations between Iran and
500 market cap – down from as much as 13% a decade major powers are a source of uncertainty vis-à-vis supply, and the
ago – illustrating that this remains quite a contrarian same holds true of weather events such as hurricanes and wild-
sector for investors. fires.

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