Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The plan to end fossil fuels gets a rain check
Ole Hansen
Head of Commodity Strategy
Head of Commodity Strategy
Summary: Policymakers kick climate targets down the road and support fossil fuel investment to fight inflation and the risk of social unrest while rethinking the path to a low-carbon future.
Realising the inflationary threat from surging commodities prices and the risk of an economic train wreck due to the unrealistic timeline for the green energy transition, policymakers kick climate targets down the road. They relax investment red tape for five years for oil production and ten years for natural gas production, to encourage producers to ensure adequate and reasonably priced supplies that bridge the gap from the energy present to the low-carbon energy future.
According to the IEA, the ambitious goal to reach net zero emissions by 2050 would require that the consumption of oil and natural gas decline 29 percent and 10 percent respectively by 2030, with further steep declines thereafter. Faced with this outlook, suppliers of these traditional energies have already begun scaling back exploration and production to such an extent that supply is already slipping relative to demand, raising prices for the energy source that still feeds the bulk of our primary energy.
This development has already jacked up prices and price volatility, not only for energy, but also for industrial metals, most of which are needed in greater quantities for the green transformation push. On top of this, surging energy prices have spiked prices for diesel and especially fertiliser, important farming costs that raise concerns about the production of key food crops.
One of the key restraints on the investment needed to maintain, much less expand, mining and energy production has been the lack of lending interest from investors and banks. Environmental, social and governance (ESG) criteria have become an increasingly popular way for investors and banks to allocate investment capital to companies.
Faced with rapidly rising commodity prices and an increasingly impossible road to carbon neutrality, policymakers make a surprise and controversial move in 2022 to temporarily relax environmental restrictions on new upstream crude oil and natural gas investments for five and ten years, respectively. The plan is sold as the only pragmatic way to bridge the reality of our energy-consuming present with the desired low-carbon future, while also limiting the risk of social unrest caused by rising food and energy prices.
Market impact: The iShares Stoxx EU 600 Oil & Gas ETF (Ticker: EXH1:xetr) surges 50 percent as the whole energy sector gets a new lease on life
See next 2022 prediction:
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Quarterly Outlook
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Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
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Ole Hansen
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Macro: Sandcastle economics
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Bonds: What to do until inflation stabilises
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Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...