Energy Sector Plunges 43% YTD: Is the End of Crude Era Near?
The coronavirus pandemic has battered the energy sector, with the price of crude oil trading below $40 per barrel. In fact, investors are gradually relocating money from energy to the technology sector as the latter is mainly driving the current economy.
Importantly, the pandemic alone is not responsible for the bleak energy outlook. Energy majors’ gradual transition from fossil fuel to renewables across the world is adding to the dreariness. Notably, leading oil companies are considering investments in non-oil businesses like renewable energy to align goals with the Paris Climate Agreement.
Oil Price Plunges
The price of West Texas Intermediate (WTI) crude has declined more than 35% since 2020-beginning. Strict lockdown measures to check the spread of coronavirus have dented global energy demand, leading to a plunge in oil price. Along with the commodity price plunge, the Zacks Oil-Energy sector has declined 43% year to date against the S&P 500 index’s 1.8% rise.
Now, the million-dollar question is: How long will it take the energy sector to return to the pre-pandemic levels? With the U.S. economy now getting support from technology giants like Apple Inc. AAPL, Amazon.com, Inc. AMZN and Microsoft Corporation MSFT instead of energy major, the energy sector could probably not spring back to the pre-coronavirus mark.
End of Crude Era
BP plc BP, in its recent energy outlook, said that the era of relentless growth in crude demand is over. This makes the British energy giant the first to announce that oil demand has reached its peak, while other players still expect oil demand growth to last for another 10 years or more.
The integrated energy major expects consumption of crude oil to never return to the level seen before the pandemic. With the gradual shifting from fossil fuel to renewables across the world, the integrated energy firm expects oil demand to at most remain flat over the next 20 years. BP added that the pace of decline in oil demand over the next three decades will depend on how quickly electric cars take over the transportation sector.
This justifies BP’s plan to lower oil and gas output by 40% over the next 10 years while investing as much as $5 billion a year in renewables. Importantly, BP targets to become a net-zero emissions company by 2050.
Royal Dutch Shell plc RDS.A is another key energy firm planning to become a net-zero emission energy firm by 2050. Importantly, the company intends to slash the carbon intensity of its products by roughly 30% by 2035. By 2050, the company, carrying a Zacks Rank #3 (Hold),plans to lower carbon footprint by 65%.
The energy space is currently under severe stress in the wake of the COVID-19 pandemic. The twin effects of coronavirus-induced demand disruption and supply glut have pushed the industry into an unprecedented crisis. The sector was already on the backfoot due to concerns about fossil fuel’s long-term sustainability with the world seeking to curtail its use. With the pandemic causing the most catastrophic dip in the energy sector across the globe, the debate about long-term oil consumption has intensified.
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