As concerns about climate change push the world economy toward a lower-carbon future, investing in oil may seem a risky bet. For the long term, that may be true.
Yet for the moment, at least, oil and gas prices appear likely to continue to rise as the economy recovers from the pandemic-driven shutdown of millions of businesses, big and small.
These countervailing trends — increasing demand now and falling demand at some point, perhaps in the not-too-distant future — create a dilemma for investors.
The good news is that an array of traditional mutual funds and exchange-traded funds are available to help them navigate these uncertain waters. Some funds focus on slices of the industry, such as extracting crude oil and gas from the ground or delivering refined products to consumers. Others focus on so-called integrated companies that do it all. Some spice their holdings with some exposure to wind, solar or other alternative energy sources.
International Energy Agency forecast that oil consumption was not likely to return to prepandemic levels in developed economies.
“World oil markets are rebalancing after the Covid-19 crisis spurred an unprecedented collapse in demand in 2020, but they may never return to ‘normal,’” the I.E.A. said in its “Oil 2021” report. “Rapid changes in behavior from the pandemic and a stronger drive by governments toward a low-carbon future have caused a dramatic downward shift in expectations for oil demand over the next six years.”
alternative energy funds. Many enable investors to zero in on discrete segments of the industry.
The biggest holdings of the Invesco WilderHill Clean Energy E.T.F. are producers of raw materials for solar cells and rechargeable batteries or builders and operators of large-scale solar projects. The $2.9 billion fund yields 0.49 percent and has an expense ratio of 0.7 percent.
The First Trust NASDAQ Clean Edge Green Energy Index Fund focuses on applied green technology. Its biggest holdings are Tesla, the American maker of electric automobiles; NIO, a Chinese rival in that field; and Plug Power, which makes hydrogen fuel cells for vehicles. Also a $2.9 billion fund, it yields 0.24 percent and has an expense ratio of 0.6 percent.
The First Trust Global Wind Energy E.T.F., as its name suggests, targets wind turbine manufacturers and servicers, led by the Spanish-German joint venture Siemens Gamesa Renewable Energy and Vestas Wind Systems of Denmark, as well as operators such as Northland Power of Canada. This $423 million fund yields 0.92 percent and has an expense ratio of 0.61 percent.
LONDON (Reuters) – BP’s trading arm made nearly $4 billion in 2020, according to a copy of an internal BP presentation seen by Reuters, almost equalling the record trading profit in 2019 despite the collapse in oil demand caused by the pandemic.
Trading revenue for majors such as BP and rival Royal Dutch/Shell shielded them from the full impact of the worst recession to hit the modern energy industry, helping finance their shift towards a new business model in a lower carbon economy.
Even with near record trading earnings, BP posted a $20.3 billion loss with writedowns in 2020 and a $5.7 billion loss without writedowns, plunging into the red for the first time in a decade.
BP, which does not publicly disclose the revenue from its trading arm, would not confirm the content of the presentation seen by Reuters and declined to comment for this article.
BP and Shell are banking on cash flow from trading to support them through their transition and to generate profit as they focus on renewable and power markets and become less dependent on fossil fuels.
BP has formally promised to cut oil and gas output, while Shell says its oil production has peaked. Both say they are expanding trading and they still make billions of dollars a year moving oil and gas around the world.
BP plans to expand power and renewables trading but many of those markets are highly regulated and unlikely to deliver the same profit margins as oil and gas.
One of the biggest trading plays in 2020 was to store oil during the downturn, buying it at low prices and selling it later when prices recovered.
It was a relatively simple game with minimal risk because the oil futures market allowed traders with access to large storage to lock in future profits through hedging.
BP made around $1.7 billion on this strategy alone in the second quarter of 2020, according to the presentation.
It made lower but steady earnings in the first and third quarter, while it generated only about $250 million in the fourth quarter of 2020 after betting on weak gas prices that soared instead, according to the presentation.
BP’s 2020 result showed the big impact oil and gas trading can have on performance.
BP Chief Financial Officer Murray Auchincloss told analysts in August on a second quarter results call that there had been an “exceptionally strong contribution from oil trading”.
Last year, was one of the most volatile for oil, which is generally good for trading. Volatility is likely to become a more prominent feature of what is an uneven transition to renewable energy worldwide.
Trading is likely to provide a financial buffer before investments in renewables start to pay off.
“We think the power of integration from our trading organisation is awfully good,” Auchincloss said in August, adding BP could secure returns on investment in “double digits” with integrated trading of oil, power, natural gas and solar energy.
Oil majors typically do not disclose any figures for their trading divisions’ performances and figures emerge once every few years through internal reports.
Without contributions from trading last year, BP’s results would have looked bleaker.
BP had a replacement cost net loss of $18.1 billion in 2020, down from a $3.5 billion profit in 2019, because of massive writedown due to low oil prices.
Without the writedowns, underlying replacement cost loss before tax was $5.7 billion, of which BP’s production division generated a $5 billion loss and refining a $3.1 billion profit.
In the BP structure, oil trading belongs to the refining division while gas trading sits under production.
The internal presentation seen by Reuters combined results of oil and gas trading under one umbrella as integrated supply and trading (IST).
Last year, IST made close to $4 billion in replacement cost operating profit (RCOP), a near record amount compared to slightly over $4 billion in 2019, according to a presentation seen by Reuters.
RCOP excludes tax and changes in value of inventories and is the closest metric to the underlying replacement cost pre-tax result. BP declined to provide company-wide RCOP metrics.
Additional reporting by Ron Bousso; Writing by Dmitry Zhdannikov; Editing by Simon Webb, Veronica Brown and Edmund Blair
Sergio Rodriguez, a consultant from St. Marys, Ga., who owns a Tesla Model X, recently drove a Mach E across the country. Mr. Rodriguez said he planned to keep his Model X, despite some serious quality issues and slow responses by Tesla that he has described in YouTube videos and on electric vehicle websites.
“I still love the Model X. In terms of performance, you want a thrill,” he said. “But you have to accept that it has a lot of imperfections. The Mach E is definitely built with quality, and it’s cool. You can’t help but look when it drives by.”
Last month, Ford sold 3,739 Mach E’s, a tiny number compared with the tens of thousands of pickup trucks the company sells every month but respectable for an electric car. This month, Volkswagen is scheduled to begin delivering its electric S.U.V., the ID.4, in the United States. General Motors recently updated its electric compact, the Chevrolet Bolt, and introduced a larger, higher-riding version of the car.
Whatever the competition brings, Tesla has enough cash on hand to finance its operations for some time. It took advantage of its soaring stock price last year by selling more than $12 billion of new stock to investors, and had more than $19 billion in cash at the end of 2020. Tesla spent $1.5 billion on Bitcoin early this year, and even if the company takes big losses on that wager, it will still have significant cash on hand.
The company, which did not respond to a request for comment, has come a long way from the dark days of 2018 and 2019, when some analysts wondered if it would survive as an independent business. Mr. Musk was struggling with increasing the production of Tesla’s most affordable car, the Model 3, and described the company’s problems as “manufacturing hell.”
Despite the recent drop, Tesla’s stock price is still up over 300 percent over the past 12 months. And its market value is more than the combined market capitalization of Toyota Motor, Volkswagen, Daimler, G.M. and Ford — companies that sell many more cars than Tesla.
Of course, any time a company is valued at many times its peers, it can be vulnerable to a sell-off if investors begin to have even small doubts. Even after the stock plunged from its high, Wall Street is extremely optimistic about Tesla. The stock trades at 144 times the profit that analysts expect the company to earn this year, a stratospheric valuation. Much hope in the market is placed on Tesla’s having a big slice of a much larger market for electric vehicles, which is why analysts expect the company’s profits to more than double by the end of 2025.