When geopolitical events unfold with the significance and scale we are currently seeing in Eastern Europe right now, the commodity markets will respond in kind.
And respond they have in dramatic fashion in 2022 as we’ve seen energy prices escalate to never-before-seen levels, causing a deep sense of consternation across Europe.
On 7 March, Quartz reported that natural gas prices hit an all-time high at €345 per megawatt-hour which represented a four-fold increase compared to a decade ago.
Oil prices (WTI Crude) have repeatedly breached the $100 barrier, resulting in industrial energy costs to rise and corporates to hastily begin hedging to protect themselves against further rises. Bold investment management teams are rapidly reallocating capital to take advantage of the opportunity.
Why is the world’s energy fossil price increasing so rapidly?
Fossil fuel prices are high due to three key factors which appeared in this order:
- A cold winter
- A rebound in economic activity
- War
The winter of 2021 was exceptionally cold, resulting in higher usage of natural gas as households turned on their central heating to keep themselves comfortable during the dark months.
This resulted in the depletion of natural gas reserves held by gas providers and the government in the UK and other European countries. When reserves are depleted, market prices rise in anticipation of higher buying activity to replenish them in time for the next winter.
A rebound in economic activity also brings with it higher energy demands. The more businesses are active (particularly energy-intensive heavy industries), the more gas and oil is consumed by European economies, which is naturally increasing the demand and price of fossil fuels.
Finally, the hostile actions of Russia have poured fuel onto the bonfire in commodity markets by causing widespread anxiety about the security of Europe’s gas and oil supply.
Russia is a major net exporter of both strategic commodities, and the Kremlin has already shown a willingness to throttle supplies before hostilities began.
The prospect of Russia completely switching off gas supplies to Europe remains firmly on the table, despite the obvious negative impacts this would have on Russia’s own economy and ability to finance its military machine. This is sending gas prices into the stratosphere as firms try to stockpile gas reserves, and alternative gas providers such as Qatar find themselves inundated with requests to supply new customers.
Reasons why to invest in the renewable energy market now
Fortunately, fossil fuels are not the only source of energy in the 21st century. Renewable forms of energy production, such as wind, solar and geothermal, are all growing as a share of total energy production capacity.
The high prices of fossil fuels will directly lead to new investment in renewable energy infrastructure, which has not seen costs escalate in the same manner and therefore look like cheaper alternatives.
What are the best renewable energy stocks to invest in?
The best companies to invest in within the renewable energy space will be those producers with an existing scale that will put them in an advantageous position to accept and fulfil orders over the next three years.
Forget conceptual start-ups with experimental solar panel designs. The big money arriving at the renewable marketplace needs energy now, and therefore that money will immediately find its way into the pocket of existing firms who can meet the varied needs of large corporations and government sector organisations looking to pivot away from fossil fuels and the political scandal associated by the end of 2022.
