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INVESTMENT STRATEGY QUARTERLY

2022

Gas is always more seasonal than oil, so weather-related uncer-
tainty is inherently greater. Interestingly enough, the higher oil
prices go, the more downward pressure it will put on gas prices. Outlook on Prices:
The reason is this: all else being equal, higher oil prices incen- Looking Ahead
tivise more oil drilling and therefore more supply of what’s known
as associated gas, though it is true that oil and gas companies We expect to see oil prices increase
throughout 2022 with lower prices
have become more disciplined with capital allocation, so the earlier in the year and higher prices
associated gas factor isn’t as impactful as it has been historically. toward the end, averaging $75/Bbl for
WTI and $78/Bbl for Brent.
ENERGY TRANSITION
While share prices of oil and gas companies continue to fluctuate
with commodities, the past year also brought numerous reminders
that energy transition is an irreversible megatrend – and, ulti-
mately, more important for the Energy sector than either COVID or
geopolitics. Energy transition refers to the gradual but inexorable
trend away from fossil fuels, toward renewable and other low- WTI CRUDE
carbon energy sources. This is happening for a combination of
political/regulatory and economic/technological reasons. High $80/Bbl
commodity prices are an example of the latter category. When
drivers are frustrated by expensive gasoline at the pump, they are
more likely to buy an electric vehicle. Likewise, electric utilities
unhappy about paying for expensive coal or natural gas are more
likely to invest in wind and solar power plants. If, hypothetically,
oil prices were to reach $100/Bbl – which, to be clear, we are not
predicting – it would cause serious economic pain, but also have
the side effect of accelerating the EV adoption curve. Recent head-
lines from China (coal shortages) and the UK (scarcity of drivers for BRENT CRUDE
delivering fuel) pointed to the importance of diversifying energy
supply, even setting aside environmental considerations. $83/Bbl

Near the end of 2021, the United Nations climate conference,
COP26, drew attention to how governments around the world are
approaching the issue of climate change. Broadly speaking, cli-
mate policy can be divided into ‘sticks’ and ‘carrots.’ Sticks include
carbon trading programs – the largest ones are in the European
Union and China – along with carbon taxes in countries such as
Japan, South Africa, and Canada. These policies are designed to
make carbon pollution more economically costly. Carrots include
a wide range of incentives for clean energy technologies: NATURAL GAS
everything from electric buses and green hydrogen (for busi-
nesses) to rooftop solar systems and energy-efficient appliances $4.50/Mcf
(for consumers).
Source: Raymond James Equity Research

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