Our Take on the Energy Crisis

Resilient demand for energy and a lack of sufficient available supply in certain regions have created an energy crunch that has pushed up global energy prices. Natural gas inventory levels below five-year norms in Europe have led to gas price spikes in the region (see the chart below), and coal and oil prices have similarly been soaring, all driving up the cost of electricity across the globe. We believe this energy crisis has short- and long-term investing implications.

SHORT-TERM IMPLICATIONS

Winter is coming. The energy crunch is happening just as the winter heating season is approaching in the Northern Hemisphere. The high prices and low inventory levels we are seeing today leave relatively little wiggle room for the possibility of a colder-than-normal winter, given the typical increased demand during the winter months for natural gas and other heating fuels. As winter approaches, we expect prices to remain elevated, and we will be watching the potential inflationary impacts as a result.

We expect U.S. liquefied natural gas (LNG) companies to benefit. We believe energy infrastructure companies that collect, move and export LNG could be poised to grow cash flow, as demand for natural gas remains strong and other regions look to the U.S. for supply.

LONG-TERM IMPLICATIONS

The energy transition will take time. In our view, it will take decades for renewables to become the main source of power generation, and this transition will require significant investment in a variety of technologies to overcome the intermittency issues of wind and solar power. We strongly believe the energy transition presents opportunities for investors both today and over the longer term, but we also believe continued investment in traditional oil and gas energy sources will be necessary to maintain a balanced and reliable market. In our view, this dynamic will create opportunities for traditional midstream companies, particularly in areas where production growth will come: the Permian Basin, on the crude side, and areas like the Marcellus Formation and the Haynesville Shale in the U.S., on the natural gas side.

U.S. hydrocarbons have an important role to play. Consumer access to affordable and reliable energy is important—and can be a matter of life or death—when temperatures are extreme. Today, there is very little spare capacity to ease temporary demand surges or production disruptions. We hope stakeholders in global economies will recognize the affordability, reliability and geopolitical advantages that make the U.S. such a crucial global supplier of hydrocarbons—particularly as the world transitions its energy sources—and will eventually incentivize U.S. producers to grow volumes over time.

Further investment in energy storage will be key. We also hope stakeholders will recognize the importance of increasing investment in energy storage. This will help reduce the intermittency of renewable sources of energy, enabling many countries and regions to become more self-sufficient from an energy perspective, and lower the world’s dependence on fossil fuels. Read more on our views on real assets by downloading the full piece.

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