A perfect storm of collapsed demand due to the Covid-19 crisis and over-supply following a spat between the major producers led to an unprecedented negative oil price in April. As the worldwide lockdowns force people to stay at home, greenhouse gas (GHG) emissions have plummeted.
“The spectacular oil price crash is foremost the result of a staggering drop in energy demand, a consequence of the lockdowns implemented across a broad array of countries,” says Peter van der Welle, strategist with Robeco’s Multi Asset team.
“The capitulation moment emerged at the rollover of the May futures contract for West Texas Intermediate (WTI) oil on 19 April, as storage costs had surged, with capacity limits in sight. At a certain point, traders were willing to pay up to USD 37 per barrel for someone to take oil off their hands.”
“After this violent shake-out, rebalancing began. The demand recovery will be very gradual though, even if social distancing measures are partly removed in the second half of 2020. The future of the airline industry is clouded: are people still willing to board crowded planes as often, now that digital communication channels have proven to be just as effective?”
At face value, this bodes well for lowering carbon footprints to combat global warming and also keep pollution at bay. “The reduction in travel will lead to a large decline in GHG emissions this year; the International Energy Authority estimates an unprecedented drop of 8%, although questions remain over the extent and duration of the decline,” Van der Welle says.
“The shape of the recovery trajectories of the US (which accounts for 20% of global oil consumption) and China (14%) are key. The Chinese credit impulse, a leading indicator for both Chinese and US growth, is still decelerating, and it indicates that global oil demand will likely only increase less than half as it did during the global cyclical upswing of 2017.”
“As long as the Chinese authorities refrain from a ‘whatever it takes’ approach to stimulus, and the current lockdowns for four billion global consumers are only gradually removed, a strong recovery in oil demand is not to be expected. That raises the question of whether GHG emission reductions could also fare better than expected.”
Unfortunately not, says Van der Welle. “There is reason to believe that the blackest days for oil are already behind us, and the situation will brighten as time progresses,” he says. “Low prices will create demand. Historically, low price levels have paved the way for economic recovery, as energy-intensive industries start to take advantage. The lead time is long, however, at an average of 18 months.”
“In addition, demand could see support from a consumer whose preference shifts from subways, buses and trains to cars, as Covid-19 lingers. The eventual recovery in oil demand implies that carbon emissions will bounce back like they did following the global financial crisis.”
“The decarbonization challenge therefore remains unchanged, as we still have a long way to get to ‘carbon neutrality’ by 2050,” says Chris Berkouwer, portfolio manager with Robeco Sustainable Global Stars Equities.
“We are likely still out of reach of the Paris Agreement’s ambitious targets to limit global warming to a maximum of 2 degrees Celsius and ideally 1.5 degrees above pre-industrial levels. These require reductions of 3.4% and 6.4% respectively in GHG emissions year on year until 2050, compared with the 0 and 1% gains being achieved under current policies.”
There are still positives from the perspective of using environmental, social and governance (ESG) factors in investing, Berkouwer says. “The current crisis provides a better path to meeting the targets of the Paris Agreement as support to continue green policies remains firmly in place,” he says.
“First, investing in sustainable (resource) themes, as we do in many of our portfolios, can act as an economic multiplier. Governments will push harder on the fiscal side to accelerate clean energy spending as a form of economic stimulus. For instance, the European Recovery Plan states that the ‘Green Transition’ will play a central role in relaunching and modernizing the economy.”
“Second, low oil prices are not necessarily bad news for renewable energy companies, as most renewable technologies (like solar) were already running under much better economic conditions than fossil fuels. Lastly, ESG fund flows have been very strong recently, as the evidence grows that tilting towards ESG reduces risks in investment portfolios.”
What, then, are the implications for portfolios that are exposed to the double-edged sword of low oil prices fueling both economic recovery – which is essential for returns – and the associated resumption of rising GHG emissions?
“With the decarbonization challenge remaining as relevant as ever, we will continue to reduce our environmental and carbon footprints in all our equity, fixed income and multi-asset portfolios,” Berkouwer says.
“Based on the sustainability data gathered by RobecoSAM, we can accurately measure the environmental footprint (GHG emissions, energy consumption, water use and waste generation) of our investments and benchmarks.”
“In general, sustainable investments seem to have weathered the downturn caused by the Covid-19 crisis better than the overall market, which was also reflected in the performance of many of Robeco’s sustainability orientated strategies during this crisis.”
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商号等： ロベコ・ジャパン株式会社 金融商品取引業者 関東財務局長（金商）第２７８０号
加入協会： 一般社団法人 日本投資顧問業協会