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Judging by the sound of the main road outside my house, football wasn’t the only thing coming home yesterday evening. Since the pandemic struck, what had previously been a loud commuter belt had become eerily silent through rush hour. But since the reopening of schools in March and, more noticeable recently, the return of commuters to offices, normality has disrupted the local serenity.
Concurrent with the reopening of economies and offices has been a rise in fuel prices. As of 21 June, petrol prices in the UK hit 131.1p a litre, up from 115.1p a litre at the end of last year. Prices now are well above those before the pandemic, which saw them fall 20% during the 2020 lockdown1.
As well as adding to the cost of the school run, increased demand is affecting the global oil price.
Little more than a year ago, oil recorded its first negative prices for the first time in history. The price of US oil benchmark West Texas Intermediate (WTI) dropped by almost 300% on April 20 to trade around -$37 a barrel.
Meanwhile the price of brent crude, the global oil benchmark, dropped over 70% from a peak of just under $70 a barrel at the start of 2020, to a low of just over $19 in April.
As economies stalled and demand ground relentlessly to a halt, the OPEC+ group of nations that control the oil supply decided to curb output by 10 million barrels a day in order to keep prices under control.
Now, with economies reopening, things are looking more positive. Brent crude is up 48% this year to $76 a barrel, and OPEC is expected to keep output rising steadily when it meets later this week. With plenty of headroom to do so - current output still sits well below pre-pandemic levels - demand is set to increase too. The International Energy Agency forecasts that consumption over 2022 will be around 5% higher than 2020 levels.
All this would be good news for traders dealing in the underlying commodity, who essentially bet on the future oil price. They’re beginning to speculate that the $100 a barrel mark will soon be surpassed.
Intuitively, a rising oil price also sounds like good news for energy companies like BP and Royal Dutch Shell too. But, with those producers cutting back investment in oil and gas exploration, that may no longer be the case.
Their reasoning centres around concerns for the long-term viability of fossil fuel consumption. It’s likely we’re approaching peak demand for oil as renewable sources take its place as the bedrock of energy production.
Producers are responding to this shift differently. Some, like BP, have been clear in their intentions to switch to renewable sources of energy as soon as possible. Recently appointed chief executive Bernard Looney has made clear his vision for BP to become a more sustainable business. He declared early in his tenure that the company would achieve net-zero carbon emissions by 2050.
Others which have been more sluggish are coming under increased pressure - both externally and internally. Last month, Shell was forced to cut its net carbon emissions by 45% by 2030, after a Dutch court was left unconvinced by the company’s current climate strategy.
Over in the US, Engine No 1, a tiny hedge fund, persuaded shareholders in Exxon Mobil to elect at least two of four nominated directors to Exxon’s board, after months spent campaigning for the oil giant to accelerate its transition to green energy.
What’s startling about the Exxon case is that these were not climate activists calling for change (Exxon has dealt with its fair share of those in the past). Instead, the motives were entirely financial. Chris James, Engine No 1’s founder, said: “Exxon thought this was ideological… our idea was that it would have a positive impact on the share price”. The hedge fund realised the direction of travel, and thought Exxon was in danger of missing the boat.
No one’s sure when “peak oil” will arrive, but rising fuel prices could be the push consumers need to shift away from dirty energy and buy into the green transition.
This uncertainty has spilled over into the long-term oil contracts, which are trading at a steep discount to those today. Even if peak oil remains some way in the distance, fears mount that a lack of exploration investment will soon see supply lag demand and cause a supply crunch, or falling demand will lead to a glut.
Clearly, these are interesting times for the oil majors. It’s becoming increasingly clear that their futures depend on their capacity to transition to renewable energy production. Their shareholders realise this, even if they don’t. That means a rising oil price isn’t quite the boon it used to be.
1 RAC Foundation, June 2021
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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