Oil and gas stocks have mostly underperformed in 2019, as commodity prices floundered amid an increase in supplies.
Crude oil averaged about $63.50 per barrel this year — 9% lower than the average price in 2018 of almost $70 per barrel. Meanwhile, natural gas struggled even more.
Natural gas prices have averaged 18% lower in 2019 than they were last year.
As a result, the energy sector was one of the lowest performing in the market this year. The S&P 500’s energy sector, for example, has returned 7.9% in 2019, while the S&P 500 itself has returned 30.7%.
Some have begun to wonder if lower returns from oil and gas stocks this year were the result of changing attitudes toward climate change. In a recent CNN Business article, Matt Egan asks, “Are oil companies the new vice stocks?”
Egan writes that an increase in climate change awareness and socially conscious investing has made fossil fuel stocks less appealing. “Put simply,” Egan says, “fossil fuel companies are in the penalty box. And that’s depressing valuations.”
I don’t believe that’s necessarily the case.
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While there has no doubt been an increase in climate change awareness and socially conscious investing, I don’t believe this translated into lower returns from the energy sector this year.
The fact is awareness of climate change has been increasing for decades. It was just called something else: “global warming.” If awareness of climate change significantly affected the valuations of energy stocks, the market would have noticed long ago. And that hasn’t been the case.
I do recognize, however, that climate change awareness has significantly increased this year in particular. But it’s worth noting that most of that awareness was clearly the result of political contention between the liberal and conservative parties. And those who became aware (or more aware) of climate change were probably not significant investors in the first place and had no effect on the market.
I think the same goes for socially conscious investing. I recognize that socially conscious investing has rapidly developed as a concept over the past several years. But I have a hard time believing there were enough people who had a socially conscious change of heart concerning their investments in oil and gas companies that they effected change in the energy market this year.
Most likely, energy stocks underperformed simply due to depressed prices as a result of a supply glut, and increases in climate change awareness and socially conscious investing had little to nothing to do with changes in the market this year.
In all fairness, Egan does, in fact, mention supplies as a major contributor to energy prices, particularly in the natural gas markets. But he concludes, “In the 2010s, excess supply was the defining challenge for the energy industry. In the coming years, it could be climate change.”
And with this I must agree… but with a caveat.
I’ve been around long enough to know almost anything “could” happen. Fact is, things I never thought would happen are happening right now.
So in the spirit of “could happen”… sure, climate change could be the defining challenge for the energy industry in the years to come. More likely, however, I think it will continue to be supply.
Fossil fuel demand is still expected to continue rising through at least 2040. While the use of alternatives is also expected to increase in tandem, oil demand forecasts expect lower demand growth compared to previous years, but growth nonetheless.
The IEA, for example, expects global oil demand to reach 106.4 million barrels a day in 2040, compared to just under 100 million barrels a day right now.
Those expectations of lower demand growth, if anything, have more likely created less appeal for the fossil fuel sector over the past few years. Nevertheless, investors should consider that, even though oil demand isn’t growing as fast as it once was, the world still needs to be supplied.
2019 was not a great year for oil and gas stocks. But it wasn’t necessarily a terrible year, either. And that’s okay.
Broadly speaking, oil and gas stocks have offered opportunity for decent return and (unlike any of the tech unicorns) provided good security of principle. I see that as a continuing trend.
Until next time,
Luke Burgess
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
