Fossil fuel commodity prices are likely to remain volatile with the prospect for further embargos. This is a manifestation of non linear events around a trend and should not be interpreted as a structural alteration of the long term underlying bearish commodities outlook on the basis of declining demand in a carbon constrained world.
Although short-term measures may be needed to ensure system supply security, this should not prompt any more long-term investment in fossil fuel projects which risk new stranded assets and missed net zero emissions targets.
The situation should serve as an accelerator for the energy transition. Policy action will the feedback loop. An increase in fossil fuels on the system will be temporary.
While the energy trilemma – security, affordability, clean – is currently skewed towards security, rising affordability concerns bring risk for fossil fuel companies. Price caps and windfall taxes target fossil fuel assets, possibly a precursor to further asset stranding. Faster deployment of renewables will address affordability in a more sustainable manner. Renewables are now cheaper than fossil fuel in most regions.
BP has been the oil major most exposed to Russia. This will likely push BP to accelerate its energy transition strategy. A number of other oil majors have been forced to take similar charges TotalEnergies and Shell, in particular.
LNG may address security of supply on a short term basis but we would caution investors against extrapolating long term return assumptions in the way such assets may have produced in the past from this current push.
Investors should avoid being tempted to back new fossil fuel power generation plant build on the back of security dominance.
The Russia-Ukraine war could stall automakers’ ability to meet EU fleet average emissions target in 2022, mainly due to disruption in the supply of key components from Ukraine.
Companies should continue to consider the impacts of the energy transition on medium- to long-term price and demand assumptions and the timing of asset retirements, on their current financial reporting.