The Winners And Losers Of The Next Energy Supercycle

The Winners And Losers Of The Next Energy Supercycle
Reda Farran, CFA

over 2 years ago5 mins

  • We could be entering a new supercycle in energy, leading to higher for longer energy prices.

  • Some of the winners in such a scenario include energy producers, liquified natural gas firms, coal miners, and less regulated power utilities.

  • Some of the losers in such a scenario include materials and metals companies, heavily regulated utilities, and agriculture machinery makers.

We could be entering a new supercycle in energy, leading to higher for longer energy prices.

Some of the winners in such a scenario include energy producers, liquified natural gas firms, coal miners, and less regulated power utilities.

Some of the losers in such a scenario include materials and metals companies, heavily regulated utilities, and agriculture machinery makers.

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Energy prices are soaring right now, and this crisis doesn’t look like it’s going to clear up anytime soon. Some traders even think we could be entering a new energy supercycle – a sustained period of sky-high demand and struggling supply that could spell higher prices for years to come. And if that’s the case, there’s bound to be some stock market winners and losers along the way…

Firstly, why are energy prices on the rise?

There are a whole host of reasons. At the most basic level, countries are more reliant than ever on natural gas to generate electricity, power industries, and heat homes, particularly as they aim to move away from coal and toward cleaner energy. Then there’s the strong post-pandemic economic recovery, which has led to a surge in demand as governments try to get their economies firing on all cylinders again. The problem is that supply hasn’t been able to keep up with demand, pushing prices higher.

Compounding the issue is that winter is on the horizon, which means countries are trying to outbid one another to fill storage levels before heating demand spikes. But between European storage sites currently holding historically low levels of gas for this time of year and China ordering state-owned energy firms to secure supplies at all costs, many traders believe that natural gas prices are only headed higher – and that’s after a 400% surge in European gas prices so far this year.

Those surging natural gas prices are having knock-on effects on oil prices too, with some electricity producers now switching to the black stuff. Governments and companies haven’t been investing enough to increase production capacity either, which has conspired to push the price of a barrel of oil to a three-year high of $80 last week. And Goldman Sachs and Bank of America think there’s even more to come, recently upping their year-end oil price forecasts to $90 and $100 respectively.

Who are the winners of the price rises?

Energy producers

Perhaps the most obvious beneficiaries of higher energy prices are the big oil and gas producers of the world. TotalEnergies and Eni, for example, could see a 2022 earnings boost of 18% and 12% respectively if the current tightness in the gas market continues, according to Goldman Sachs. Exxon Mobil, meanwhile, said last week that elevated gas prices will boost its third-quarter profit by about $700 million. Other energy majors set to benefit include BP, Chevron, Royal Dutch Shell, and ConocoPhillips. A cost-effective way to invest in all these stocks is via the iShares Global Energy ETF.

Liquified natural gas (LNG) firms

Countries that don’t have much natural gas are desperately scrambling to secure it from gas-rich countries. And while natural gas has traditionally flowed across borders through pipelines, an increasing amount is being carried by LNG tanker ships. So firms well-positioned in the booming LNG market – like Royal Dutch Shell and Cheniere Energy – are set to benefit as the natural gas market remains extremely tight throughout the winter.

Coal miners

The natural gas shortage comes at a time of low electricity output from wind turbines and nuclear plants, which has forced many electricity producers to burn coal instead. That’s pushed up the price of coal significantly, and it’ll provide a profit windfall to coal mining companies like Arch Resources and Peabody Energy in the US, Glencore in Europe, and China Shenhua Energy, China Coal Energy, Adaro Energy, Whitehaven Coal, and Coal India in Asia. What’s more, these firms’ stocks trade at rather cheap valuation levels because so many institutional investors are barred from owning them.

Who are the losers of the price rises?

Materials and metals companies

Energy-intensive materials and metals companies will be hurt more than most from rising power prices. In Europe, that includes construction materials manufacturer Sika, steelmaker ArcelorMittal, and cement producer Holcim. In the US, there’s steel producer Nucor and paint maker Sherwin-Williams. In Asia, take a look at Aluminum Corporation of China, Baoshan Iron & Steel, Angang Steel, China National Chemical Engineering, and Zhejiang Longsheng Group.

Power utilities

Heavily regulated electricity providers will have a much tougher time increasing their tariffs, so surging fuel costs will most likely lead to falling profits. That might be why shares in southern Europe’s heavily regulated utilities, like Iberdrola and Endesa, are trading at their lowest levels in more than a year. Asia’s potential losers, meanwhile, include Korea Electric Power and Tokyo Electric Power.

On the other hand, less regulated utilities or independent providers can pass on higher costs more easily and, in some instances, even profit from all the volatility. That’s why investment bank Barclays recommends utilities in less heavily regulated northern Europe, like Electricité de France (EDF), Engie, Fortum, and RWE.

Agriculture machinery makers

Natural gas is key to making fertilizer, which means the recent spike in prices is pushing up the cost of manufacturing. Some European producers are even going as far as to cut output, which will increase costs for farmers and dent their incomes if they can’t pass them on. In fact, the price of food is already increasing at its fastest rate in over a decade.

Lower farmer incomes mean they’re less able to make big purchases on agricultural machinery, with farmers potentially delaying the purchases or canceling them altogether. That’s not ideal for Deere & Co, AGCO, Lindsay Corporation, Caterpillar, and Alamo Group.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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