by Robert Rapier, Investing Daily
Investing Daily Article of the Week
Some years there is an energy story so big, there’s no question it belongs at the top of the list. The Deepwater Horizon oil spill in 2010. The Fukushima Daiichi nuclear disaster in 2011.
In 2020, that story was the emergence and subsequent consequences of the COVID-19 pandemic. Let’s take a closer look at what it all means for investors.
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1. COVID-19 pandemic wreaks havoc on the energy sector.
Many of the big energy stories of 2020 are directly attributable to the fallout from the COVID-19 pandemic. Oil demand was crushed beginning in the first quarter as stay-at-home orders were implemented. Airline travel plummeted. Demand for gasoline plunged to a 50-year low. Ethanol demand for gasoline blending fell sharply.
Oil prices fell all the way into negative territory, and U.S. oil production fell in response. Oil companies saw their share values get crushed. All of those are major energy stories, but all were a result of the pandemic.
2. Saudi Arabia/Russia price war.
In 2019, global oil prices remained under pressure due to growing U.S. shale oil production. In December 2019, OPEC and Russia attempted to respond to sliding oil prices with new production cuts. But then in January, oil demand also began to be impacted as China took measures to control COVID-19.
OPEC members met with Russia with the hope of announcing additional production cuts that might stabilize oil’s free fall. This time Russia refused, and Saudi Arabia slashed oil prices in response. The result was the beginning of a steep slide in oil prices that worsened as the pandemic gained a foothold in the U.S. In just about any other year, this may have been the top story, but this is another story that is in part a consequence of the pandemic.
3. Natural gas prices fall to the lowest levels in over 20 years.
One of my 2020 energy sector predictions, which predated the pandemic, was that we would see the lowest average annual natural gas price in more than 20 years. The previous 20-year low happened in 2016, when natural gas prices averaged $2.52/MMBtu for the year.
Indeed, this year prices have been significantly lower. Through December 15 the average natural gas price for 2020 was $2.00/MMBtu. This is partially a function of the pandemic, but primarily a function of years of expanding U.S. natural gas production.
4. ExxonMobil toppled.
ExxonMobil (NYSE: XOM) had consistently been the largest publicly traded energy company by market capitalization for a long time. That changed in early October when NextEra’s (NYSE: NEE) market capitalization surpassed ExxonMobil’s to become the largest U.S. energy company. Then, a week later Chevron’s (NYSE: CVX) market cap surpassed ExxonMobil’s.
But ExxonMobil has been around for a long time, and the company didn’t stay down long. By year-end, the company had rallied and regained its top spot. However, given the trends in recent years away from fossil fuels, it may be just a matter of time before NextEra, buoyed by its strong push into renewable energy, surpasses ExxonMobil permanently.
5. Presidential election.
This wouldn’t have been a top story if President Trump had won reelection, but Joe Biden’s victory will signal some sharp changes in energy policy. Biden has already announced that the U.S. will rejoin the Paris Agreement on climate change. Biden’s policies are expected to further discourage the use of fossil fuels and encourage the use of renewables.
Honorable Mentions
There were several other stories worth mentioning. Many of them are direct consequences of the COVID-19 pandemic.
- Congress last week agreed on the most significant piece of energy legislation in more than a decade, part of the $1.4 trillion omnibus spending bill. After last-minute drama Sunday night, President Trump signed the bill. (For details of the energy provisions, click here.)
- 2020 also saw a return of hydrogen to the energy conversation as a potential alternative to fossil fuels. Hydrogen, which was once hyped by President George W. Bush, has a spotty history as the “fuel of the future.” But the dramatic decline in the cost of renewable power has helped return hydrogen to the mainstream conversation. Hydrogen stories were everywhere in the media in 2020.
- Carbon emissions recorded the largest decline on record, as a result of the oil demand destruction brought on by COVID-19.
- Royal Dutch Shell (NYSE: RDSB) cut its dividend for the first time in 75 years.
- China successfully initiated a nuclear fusion reactor for the first time.
- COVID-19 accelerated the pace at which companies have accepted the remote worker. This had dramatic implications across many sectors. Video conferencing services exploded as demand for gasoline plunged. Utility consumption patterns shifted. People relied more on companies like Amazon (NSDQ: AMZN) to deliver goods to their homes.
I will offer my predictions for 2021 in a couple of weeks, but my hunch is that COVID-19 will once again dominate the energy conversation. Hopefully, we will be discussing the rebound in the economy as the pandemic comes under control.
Caption graphic: Exxon Dethroned – Exxonmobil Whitefield @nicepng.com
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