2022 saw an acceleration of the energy transition, as the war in Ukraine prompted a wholesale re-evaluation from governments of the way they source and use energy, says Mark Hume, manager of the BlackRock Energy and Resources Income Investment trust.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Russia’s invasion of Ukraine has had a profoundly disruptive impact on energy markets in 2022: it has highlighted the world’s ongoing reliance on fossil fuels, but also galvanised investment into alternative energy sources as countries confronted the necessity of energy independence. This ‘replumbing’ of energy markets is likely to be a major feature of energy markets in 2023.
The immediate vacuum left by Russian sanctions has forced European governments to find new, short-term sources of supply. Liquified natural gas (LNG) has proved a temporary fix, with countries also switching coal plants back on. The pressure in key energy markets has eased, with natural gas and crude oil prices dropping in the latter half of the year.
Nevertheless, in our view, prices are unlikely to drop significantly even as recession bites. This is particularly evident in the oil market. OPEC’s announcement of reduced production targets in October demonstrates a willingness to be more reactive to manage oil prices. This should support prices amid economic uncertainty. For energy companies, this should make them more defensive in the year ahead. The US administration’s announcement that it will buy oil at prices below $721 also puts a floor under oil prices.
Higher oil prices have not yet resulted in notably lower global demand. Demand remained relatively high and may rise further as China shifts its zero Covid policy. Nevertheless, higher interest rates and recession across most major economies could weaken demand, as could high prices.
The supply of oil remains tight. The past decade has seen relatively little investment in new oil production, with the exception of US shale oil. Energy company balance sheets are much stronger today than in the past downturns, once notorious for profligate spending.2 Investors have encouraged capital discipline on the sector, which should bring an end to unchecked US shale growth. Many energy companies have committed to return free cash flow to shareholders rather than return to maximising production. This means supply is likely to remain tight, while demand continues to increase.
Sustainable energy
New commitments from governments on sustainable energy production has been a key feature of 2022.
Governments across the world have committed significant capital to bringing green energy sources on stream via the EU Green Deal and recent REPowerEU in Europe; in China for wind, solar and EV adoption and in the US via the Inflation Reduction Act.
This is unlikely to diminish in 2023, with three powerful factors in play: supportive regulation and policies; a new drive for energy security and independence; and cost. On the latter, there is now an expectation that traditional energy prices will remain higher for longer, making sustainable energy sources more cost competitive.
Renewable energy costs for onshore wind and solar panels now represent the most economic technology choice for power generation in many markets, which is 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 an increase in EV adoption.
The transition to a lower carbon economy is a multi-decade phenomenon and will prove disruptive for many industries and business models, while also creating significant opportunities for those businesses on the right side of change. The sums involved are eye-watering, the International Energy Agency estimates that annual clean energy investment will need to more than double to US $4trillion by 2030.3 This puts significant money in motion.
Investment consequences?
The BlackRock Energy and Resources Investment trust is positioned to capture the opportunities from an energy market in flux. We believe that the scale of the growth opportunity for the sustainable energy sector as a whole over the coming years has been under-appreciated both as a play on capital allocation and attractive long-term investment exposure.
However, the transition will also affect the traditional energy providers. In the year ahead, the trust has a bias towards higher-quality oil producers which we expect to benefit the most from a stronger for longer oil and gas price environment, a potentially resurgent oilfield services sector and the need for increased Liquified Natural Gas (or LNG) output to replace Russian gas exports into Europe.
We retain the flexibility to shift the portfolio between sustainable and legacy energy production as the environment dictates. This has been a vital year for energy producers and 2023 promises to be every bit as exciting.
For more information on how to access the opportunities presented by the energy sector, please visit www.blackrock.com/uk/beri
1 https://www.bloomberg.com/opinion/articles/2022-12-12/it-s-time-for-biden-to-unleash-his-mega-oil-trade Bloomberg- 12 December 2022
2https://www.ft.com/content/05d853b1-b8e4-49e7-992d-58516bf7423e#:~:text=Rating%20agencies FT – 13 February 2022
3https://www.bloomberg.com/opinion/articles/2022-10-27/green-energy-costs-trillions-oil-savings-can-offset-that Bloomberg - 27 October 2022
Risk Warnings
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust-specific risks
Counterparty Risk
The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency Risk
The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Emerging Markets
Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Gearing Risk
Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Investments in Mining Securities
Investments in mining securities are subject to sector-specific risks which include environmental concerns, government policy, supply concerns and taxation. The variation in returns from mining securities is typically above average compared to other equity securities.
Important Information
In the UK and Non-European Economic Area (EEA) countries: this is issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.
This document is marketing material. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.
Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.
The investment trusts [listed below/above/in this document] currently conduct their affairs so that their securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to nonmainstream investment products and intend to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are securities issued by investment trusts. Investors should understand all characteristics of the funds objective before investing. For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in local language in registered jurisdictions.
Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.
This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.
© 2023 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
