It was not that long ago in April 2020 when US crude oil had gone negative ( below $0) as the Covid shutdown caused us to run out of physical places to store crude.
It became the “hot potato” of the commodity sector. While the globe flipped short term consumption into the “ off “ position, it was not as easy to do in capital and labor intensive industries such as oil and natural gas.
Prior to the pandemic, the sector was already experiencing an evacuation of both financial and physical investment due to the ESG/Carbon Zero movements underway and the desire of capital sources to reduce their exposure to the industry in its entirety.
We saw this reflected not just via 13F ETF flows, but also via the Public Pension Plan minutes which Dakota provides in Marketplace.
Many pension, endowments, and foundations had made it clear that they were pulling investment allocations completely away from fossil fuels moving forward.
By November of 2020, the energy sector had sunk to below 2% of the entire S&P 500 on a market cap basis.
To put this in perspective, over the past 40 years, energy stocks went from 30% to less than 3% of the S&P 500, and now make up none of the top 10 biggest stocks.
During the 2010s, the sector rose just 3.3% per year from 2010-2019 versus 13.4% annual returns for the overall S&P 500. All of this led to energy having the worst price performance versus the SP 500 since the Great Depression and having a weighting smaller than Apple.
(source : Bespoke Investments)
Once the vaccines were released, particularly in the US, where there was a robust rollout program, many realized that we did in fact need diesel, jet fuel, natural gas and other forms of fossil fuels for the world to operate and re-open. Yet, the industry had suffered from under-investment and human capital for over a year now as many viewed investment in fossil fuels as socially unacceptable.
In mid-2021, the demand for oil, gas, and natural gas by-products had already reached pre-Covid levels, yet OPEC was already pumping at 2019 levels with very little to no spare capacity.
Over the past three quarters now, as energy companies reap the benefit of spiraling oil and natural gas prices, the energy sector is catching up again and flows have followed with energy being the unloved to being on the world stage.
Looking under the hood, the last two quarters have shown a preference towards exploration, production, and drilling focused ETFs and closed end funds.
Allocators are looking for operating and earnings leverage from these companies being so lean right now and that they have pricing power. MLPs have participated in an increase as well, but much less due to their role in the sector.
While the sector is in favor today, we have seen boom and bust cycles in energy before and ESG trends will continue as many countries strive to get to Net Zero in carbon emissions. Some additional things to consider include:
Below are the top energy EFTs held by allocators as reported via 13Fs at the end of Q1 2022.
The above are the top 10 biggest holders of energy ETFs so far in 2022. For more information on each of these firms, their holdings, and more, we'd love to offer you a free trial of Dakota Marketplace.
Written By: Gui Costin, Founder, CEO
Gui Costin is the Founder and CEO of Dakota.
May 19, 2022
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