Black Monday carnage can help wind investors

It was a Monday morning that lived up to that grim reputation.

This week started with shares around the world plummeting as stock markets endured their worst day since the financial crisis of 2008. Markets around the world closed around 7%-8% lower than they started the day, and it has been dubbed ‘Black Monday’. It was so bad that it didn't even get an original name!

There are two main reasons for the Monday carnage, and both are of direct relevance to companies investing in the renewables sector.

The first is the Covid-19 pandemic that has led to increased market turbulence for weeks, and from which no sector can escape. The second is the fierce oil price war now raging between Saudi Arabia and Russia. And both are related.

Last week, Saudi Arabia asked the members of the Organisation of Petroleum Exporting Countries to cut oil production by 1.5million barrels a day to soften price falls caused by Covid-19.

However, Russia refused as driving down oil prices can raise the pressure on US oil and gas producers, and maybe also slow the growth of electric vehicles.

This provoked Saudi Arabia to declare a price war and cut oil prices to Asia by $6 a barrel, to the US by $7 a barrel, and to Europe by $8 a barrel. As a result, the price of crude oil fell by more than 25% on Monday, which is the largest fall since the 1991 Gulf War, and now lingers at around $35 a barrel.

Then, as an encore, Saudi Arabia announced on Tuesday that it would increase crude oil production to 12.3million barrels a day next month. Russia is set to do likewise, which will drive prices lower, and the pair may raise production further. Their current pact on production restrictions expires on 1st April.

What's the reason for this spat? Partly big egos. But both countries want to grow market share even as Covid-19 has damaged global demand for fossil fuels. The winners should include large oil importers and consumers.

But will investors in renewables be winners too?

Well, there is a school of thought that the oil price crash could hinder demand for the low-carbon energy transition. When oil prices fall there is less pressure on firms to make a shift to buying power from renewables or to use fossil fuels more efficiently. The impact on government policies is also unknown.

And yet we remain confident in the investment case for wind.

First, economics are not the only driver for the energy transition. We see great pressure to make a change from a wide range of stakeholders, from investors to activists. These are long-term climate challenges that go beyond short-term economic cycles or temporary reductions in oil prices.

Second, this is a reminder to investors about the turbulence of putting their cash into companies that are so dependent on the political whims of Russia, Saudi Arabia and the US. Far from damaging wind, this might even hasten the move to renewables firms that offer long-term stability.

Third, this slump in oil prices will slow investment in oil and gas exploration. It may instead encourage large utilities to increase their investment in wind.

And fourth, we believe renewables has the momentum to see out this crash, in much the same way as it grew through the 2008 Great Recession and other oil price slumps since. Renewables is a bigger and stronger industry than in those slumps, with stronger economics and a more diverse range of keen investors. We expect wind projects with stable returns to be highly sought after.

But what’s your view? Are we too bullish on wind in an economy hit by a big-one two of an oil price crash and global pandemic? We’d love to hear.

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