The war in Ukraine roiled oil and gas markets

?

?This is the second article in a three-part series discussing potential opportunities in commodities.??

Changing supply and demand?

The Russia-Ukraine war roiled commodity markets. Following Russia’s invasion, commodity prices shot higher, especially for agriculture and energy resources. The Bloomberg Commodity Spot Index, which follows almost two dozen commodities, peaked in June 2022, before moving lower.[1] Yet even with the current volatility, we believe commodities continue to be an attractive asset class that offers compelling investment opportunities. In this series, we explain our reasoning and discuss:?

·??????The shorter-term effects of the Russia-Ukraine war on food and agricultural commodities.

·??????The shorter-term effects of the war on energy commodities.

·??????Longer-term opportunities in commodities overall, focusing on population growth, economic development and the move to clean energy.

U.S. Energy Information Administration, Crude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma [DCOILWTICO]; U.S. Energy Information Administration, Crude Oil Prices: Brent - Europe [DCOILBRENTEU]; and International Monetary Fund, Global price of Natural gas, EU [PNGASEUUSDM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DCOILWTICO, October 17, 2022.?

Shifting energy strategies?

Recently, Danish banks began providing blankets to employees. It wasn’t a promotion to show appreciation for hard work; it was a practical step to help workers tolerate colder indoor temperatures. This winter, bank thermostats will be set at 19 degrees Celsius (66 degrees Fahrenheit), which is significantly below the norm of 23 degrees Celsius (73 degrees Fahrenheit).[2]

Denmark is not the only country finding ways to reduce energy usage. Russia’s invasion of Ukraine, and the sanctions that followed, disrupted global energy security, upended commodity markets and realigned geopolitics. Around the world, countries have been forced to reassess and adjust their energy strategies.?China and India have begun importing more Russian oil,[3] while the US, the European Union (EU) and other nations have banned or reduced fossil fuel imports from Russia.[4]

Disruption in Europe

The disruption has been particularly painful for Europe, which was heavily reliant on Russian oil. Prior to the invasion, about 40% of the natural gas that fueled EU homes and businesses came from Russia, and some traveled across Ukraine to get there.[5] But the EU, UK and Nordic nations are taking action to reduce dependence on Russian oil and gas. These actions include:

·??????Obtaining gas from different sources,

·??????Switching to liquified natural gas,

·??????Accelerating wind and solar energy projects,

·??????Expanding nuclear and bioenergy,

·??????Modifying energy infrastructure to accommodate other types of fuel, and

·??????Accelerating energy efficiency in buildings and industry.

As winter approaches, Europe remains vulnerable to high prices and potential energy shortages. Just this fall, wholesale natural gas prices in the EU were about five times higher than prices of a year ago.[6] Recent incidents, such as the rupture of Baltic Sea gas pipelines and a Russian gas company’s threat to implement sanctions that stop the flow of gas through Ukraine to Europe, have exacerbated supply and demand challenges.

“Russia’s continued curtailment of natural gas flows to Europe has pushed international prices to painful new highs, disrupted trade flows and led to acute fuel shortages in some emerging and developing economies, with the market tightness expected to continue well into 2023,” reported the International Energy Association.[7] Furthermore, the energy picture was complicated in October when OPEC+ (which includes both Saudi Arabi and Russia) chose to steeply cut oil production to sustain prices at higher levels. The cuts have the potential to drive oil prices higher unless economic growth weakens and demand falls.

Short- and long-term opportunities for investors

The Russia-Ukraine war and recent OPEC+ decisions have constrained the world’s supplies of oil and natural gas. Low supply and high demand drove energy prices to their highest levels in nearly a decade earlier this year. Prices have since moved lower on concerns that a global recession could lower demand for energy.

While fear of recession caused some investors to retreat from commodities over the last few months, we believe the long-term case for investment in commodities remains sound. Over the coming decades, supply and demand dynamics favor an upward trend in oil and gas prices. Demand is likely to increase as:

·??????The global population grows,

·??????Emerging markets become developed markets, and

·??????The production of high-carbon fuels may fall more quickly than the production of low-carbon alternative energy sources. ?

In conclusion, over the shorter term, we see opportunities for investment in companies that support the development or modification of energy infrastructure, the expansion of alternative energy sources, and the production and delivery of traditional fuels. All are well positioned for growth. Over the longer term, we expect commodities to offer attractive investment opportunities as supply and demand dynamics continue to shift.?

If you would like to learn more or talk about how to position your portfolio in the current economic environment, contact me at [email protected] or 617-531.6954.

[1] Bloomberg Commodity Spot Index Price Data. MarketWatch. Cited October 17, 2022.

[2] Christian Wienberg, “Danish Banks Hand Out Blankets as Offices Turn Down Heating.” Bloomberg. September 22, 2022. Cited October 17, 2022.

[3] Shruti Menon. “Ukraine crisis: Russian oil and gas turn to Asia.” BBC News. September 30, 2022. Cited October 17, 2022.

[4] Jake Horton. Daniele Palumbo. “Russia sanctions: How can the world cope without its oil and gas?” BBC News. September 29, 2022. Cited October 17, 2022.

[5] “A 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas.” IEA. March 3, 2022. Cited October 17, 2022.

[6] David Sheppard. “European gas prices surge as Gazprom hits supply hopes.” Financial Times. October 18, 2021. Cited October 17, 2022.

[7]“Natural gas markets expected to remain tight into 2023 as Russia further reduces supplies to Europe." IEA. October 3, 2022. Cited October 17, 2022.