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 Trust plc (LON:BERI).  

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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.

For more information on BlackRock Energy and Resources Income Trust and how to access the opportunities presented by the energy and resources markets, please visit www.blackrock.com/uk/beri

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 BlackRock Energy and Resources Income Trust and how to access the opportunities presented by the energy and resources markets, 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

2 https://www.ft.com/content/05d853b1-b8e4-49e7-992d-58516bf7423e#:~:text=Rating%20agencies%20have%20recently%20upgraded%20several%20shale%20oil%20and%20gas%20companies%2C%20reflecting%20stronger%20balance%20sheets%20for%20a%20sector%20once%20notorious%20for%20profligate%20spending  FT – 13 February 2022

3 https://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.

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For more information on BlackRock Energy and Resources Income Trust and how to access the opportunities presented by the energy and resources markets, please visit www.blackrock.com/uk/beri