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Shell goes electric
In last week’s Editor’s View we mentioned Trump as a possible catalyst for a summer sell off and so it is proving.
And having reached two month highs in late July crude oil prices have endured another round of volatility partly inspired by the spat between North Korea and the US.
Oil often appears to be a vehicle for the market to express its view on the economic and political backdrop. Understandably given the role it plays in fuelling the world economy.
What are the long-term prospects for oil?
For now markets have calmed down, although the resulting rebound in the dollar and signs of slowing demand in China have not proved helpful to crude in the interim. As we write the global benchmark for oil, Brent, is holding just above $50 per barrel while its US counterpart West Texas Intermediate trades at around $47.
This author has generally held to the view that a combination of two factors will provide support to oil prices in the long-term. First the world still needs oil and lots of it. It remains the main way we power transportation and is used in the production of plastics and insulation products and for heating.
Second it is a finite resource and while technology may eventually unlock reserves which are beyond the reach of the world’s oil producers today, we will run out eventually.
A growing middle class in India and China buying their own cars has long been seen as a driver of oil prices but growing momentum behind a shift to electric vehicles could challenge this orthodoxy.
Electrifying the debate
In July Volvo pledged that all cars will be electric or hybrid by 2019 and regulation in the EU and other major geographies is pushing other car manufacturers in this direction.
This matters to most investors given the contribution these two companies make to the total dividend from the FTSE 100. According to the latest Dividend Monitor report from Capita Asset Services, oil, gas and energy stocks accounted for more than 12% of the available dividend income from the index in the second quarter.
Shell appears to be increasingly preparing itself for an electric future. Chief executive Ben van Beurden says his next car will be electric and the Anglo-Dutch firm has announced from early next year it will sell electricity to industrial customers in the UK, including to its own 600 domestic sites. There is talk of rolling this plan out to North America too.
It may be too early to predict the death of fossil fuels but if Shell is planning for a low carbon future it is something to think about at least and a reminder to keep an open mind about future economic and market developments.