Gas-powered trade surplus shows market’s ESG conundrum

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Many investors, the fundie says, have raced well ahead of companies and certainly governments in terms of their attitude towards fossil fuels. And they’re happy to walk past the sort of market inefficiency or dislocation that investors typically love to exploit.

Tuesday’s trade surplus is also an argument that while an overdue and urgent global energy transition is underway, it is still a transition – and there will be a level of demand for oil and gas for at least the next five to 10 years.

But at the same time, supply will continue to be tight due to limited investment and the biggest beneficiaries of tight supply have recently strengthened their positions by the announcement of mergers – Woodside with BHP’s petroleum business and Santos with Oil Search.

As broker Shaw and Partners said on Tuesday as it went overweight energy stocks, there is a compelling case here. “It is not too late to be buying oil-leveraged stocks. Oil demand is improving, US Shale supply has flatlined and OPEC spare capacity is reducing.”

But who is willing to take the leap?

Certainly asset owners and institutional investors who are shunning the sector do not appear to be budging on the ESG commitments and are instead playing the long game, steering clear of a sector that is already seeing capital costs rise due to a lack of support from lenders and investors and will see demand fall over the long term. They have no shortage of clean energy investment opportunities to chase.

Will retail investors fill the oil and gas? Will pools of private capital take advantage of the clear dislocation? Like so many things around the great energy transition, the answer is far from clear.