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While investors recognize that renewables are the future of energy, fossil fuels are likely to retain their dominant position in the near term.

Oil surged to $80 per barrel this week, its highest level since 2018, and prior to that, 2014.1 Equity markets fell as memories of $100+ oil and fears of a demand decline spooked investors. News articles playing up rising input costs from steel, chemicals, and utilities, and the shuttering of power plants or factories due to fuel shortages don’t help sentiment. But notably, two sectors are in the green so far this week, no pun intended:  clean energy and electric vehicle (EV) stocks. This begs a question – will surging oil prices and fuel shortages prompt faster switching to renewables?
In this week’s commentary, we examine why oil is likely to retain its dominance – for the moment. First, the global energy infrastructure is not ready for renewables to take over yet. With roughly 70% of CO2 covered by net-zero pledges,2 however, the world should not revert back to a full reliance on oil and coal either. Instead, in our view, the push to diversify energy sources to include more renewables should accelerate, especially as the surge in the price of oil, coal, and natural gas makes the economics of renewables look even better.
It’s not just oil prices that are soaring

Net-zero world is not yet ready for prime time, until then oil will remain dominant

Demand for oil is expected to plateau by 2030,3 when electric vehicle adoption is expected to reach 34% of overall global sales, up from 6% today.4 Even then, oil will still be the top source of energy because of its widespread use in the transportation and industrial sectors, both of which have areas that are hard to de-carbonize, like jet fuel and steel and cement manufacturing.

In the near-term, as mobility and travel return globally and winter approaches, oil demand is increasing for road, aviation, and heating. Gas-to-oil switching resulting from sky-high natural gas prices in Europe and shortages in Asia will also likely add 750,000 barrels a day to oil demand.5

With demand likely to rise, the question turns to whether the supply will come. The world is on track to run a 1.1 million barrel (bbl)/day6 deficit by December and OECD inventories are 131.2 million barrels (mb) below the five-year average.7 While there are several ways that producers could remove supply bottlenecks, none are imminent.

Barring sudden production changes, oil prices are likely to stay elevated in the near-term. And longer-term, we might also see sustained higher oil prices as U.S. oil and gas producers have severely cut back their capex since 2014 and supply constraints may continue. Against this backdrop, energy equities should be well supported, and any pullbacks should be bought. There is a lot to like about energy fundamentals right now, including a healthy profitability and free cash flow outlook, low leverage, and attractive valuations.


Longer-term, the current energy crisis adds pressure to de-carbonize and diversify sources of energy

The price of coal rose a whopping +204% and natural gas is +110% higher year to date, outpacing an impressive 61% year-to-date gain in oil.8 This should make the already appealing levelized cost of electricity (LCOE) using renewables like wind and solar even more attractive.

For example, as of the first half of 2021, the costs were calculated assuming natural gas in Europe would increase from $3.70/MMBtu in 2020 to around $5.77/MMBtu in 2050 in real terms versus $30/MMBtu that it is trading at today. For U.S. natural gas, the assumption in the model ranges from $2.68 to $4.70/MMBtu in real terms out to 2050 versus $5.44/MMBtu for the latest Henry Hub price. For China coal, the assumed price averages approximately $85/tonne versus the current price of $145/tonne at some China ports.9

And even if the current price spikes are not sustained (case in point – China recently mandated coal producers to ramp up supply to deal with shortages), looking further out, turning back to coal is not a sustainable option when cheaper and cleaner energy sources are available and the cost of coal-produced electricity is expected to rise as more production is phased out. In the meantime, structural underinvestment in oil and gas may also lead to structurally higher prices.

The cost of renewables has declined significantly

For consumers, a switch to clean energy, such as residential solar, could also make good non-financial sense. A rooftop solar installation coupled with a battery storage system, for example, could help consumers take control of their electricity costs this winter and provide grid independence (or at least supply source diversification) when electricity prices are global supply/demand dependent and/or when the increased occurrence of extreme weather events make the grid less reliable. Indeed, with the number of extreme weather events on pace to hit records in 2021,10 the benefits of adding solar panels and battery storage may increasingly outweigh the costs.

For electric vehicles, prices may converge with traditional cars faster than expected given the surge in gasoline prices to a seven-year high. The United States was on pace to reach breakeven in 2024 versus 2021 for China, assuming $51 oil.11 With oil prices soaring, this breakeven date may now be pulled forward.

All this could explain the rally in residential solar installers, EVs, and battery manufacturers so far this week. In the last five days clean energy is up +7.5% and electric vehicles are +3.9% vs. the S&P 500 which is down -0.5% under pressure from higher oil prices.

Indeed, US residential solar is on track for a record year in 2021 with 4.5GW of capacity installed or 35% up on 2020.12 EV sales are set to rise from 3.1 million units globally in 2020 to 5.6 million in 2021.13 And globally, the green ambition is strong within Europe and China, which are targeting a 32%14 and 20%15 share of renewables in electricity, respectively, by 2030, and 38 U.S. states have also set renewable energy targets.16 Improved economics should make these goals more achievable.

Ahead of the UN Climate Change Conference (COP26) this November and amid a record year of extreme weather events, global commitment to renewables and EVs is likely to grow, especially as we face surging commodity prices.

Investing in Energy Transition – In Private Markets

Investors looking to participate in the energy transition have options in public and private markets. The sustainable energy system of the future will include both traditional and renewable sources of power, with each serving to back-up the other. For example, natural gas plants will be needed to stabilize renewables electricity generation when the sun doesn’t shine or the wind doesn’t blow. And solar power coupled with battery storage can provide electricity during weather-related disruptions to traditional supply. Further, investments will be needed to make both traditional energy and renewables as carbon neutral as possible.

For investors, tactically we recommend staying long oil and gas, as fundamentals are much improved. We are also buyers of clean energy. Finally, a big part of this energy transition is happening in private markets, where disruptive companies are improving wind and solar and battery storage capabilities, and innovating with new carbon capture, zero-carbon synthetic fuels, and hydrogen technologies. Please see our A Clean Tech Investment Opportunity commentary for more.


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1. Bloomberg, as of October 10, 2021.
2. IEA, Net Zero by 2050 – A Roadmap for the Global Energy Sector, May 2020.
3. Bloomberg NEF, Electric Vehicle Outlook 2021, June 2021.
4. IEA, Global EV Outlook 2021, April 2021.
5. JPMorgan Commodities Research, October 1, 2021.
6. JPMorgan Commodities Research, September 24, 2021.
7. IEA, Oil Market Report, August 2021.
8. Bloomberg, as of October 11, 2021.
9. Bloomberg NEF, 1H 2021 LCOE Update; Bloomberg, as of October 13, 2021.
10. The Emergency Events Database (EM-DAT), as of October 6, 2021.
11. Bloomberg NEF, Electric Vehicle Outlook 2021, June 2021.
12. Bloomberg NEF, 2H 2021 US Renewable Energy Market Outlook.
13. Bloomberg, Bloomberg NEF, 3Q 2021 Electrified Transport Market Outlook.
14. European Commission, 2030 climate & energy framework.
15. National Energy Administration of China, 13th Renewable Energy Development Five Year Plan, December 2016.
16. EIA, September 2020.


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Anastasia Amoroso

Anastasia Amoroso

Anastasia Amoroso is a Managing Director and the Chief Investment Strategist at iCapital. In this role, she is responsible for providing insight on private and public market investing opportunities for advisors and their high-net-worth clients. Previously, Anastasia was an Executive Director and the Head of Cross-Asset Thematic Strategy for J.P. Morgan Private Bank, where she identified and invested in emerging technologies and disruptive trends such as artificial intelligence, decarbonization, and gene therapy. She also developed global tactical ideas and implemented institutional-level implementation across asset classes for clients. Anastasia regularly appears on CNBC and Bloomberg TV and is often quoted in the financial press. See Full Bio.