Energy markets are many things. Crude oil is key for transportation (more than 50% of demand), but energy markets are also about heating (here natural gas prices are key determinant of the price consumers are paying), and manufacturing and households using electricity for production and living. Here the 1-year forward price on baseload electricity in Germany is still sitting 250% above levels observed in 2013. The war in Ukraine has made energy markets more sensitive to adverse developments and the weather this winter will play a crucial role for Europe.
With energy coming back into focus it worth reflecting on the expected returns in the global energy sector. The MSCI World Energy Sector Index has a dividend yield of 4.1% and a buyback yield of around 1%. Even assuming no real earnings growth over the next decade leads to quite interesting real expected rate of return of more than 5%.
Nuclear vs offshore windThe collapse of Orsted over enormous problems around their offshore wind projects in the US has put offshore wind power into question in relation to the green transformation. To make things worse, Orsted said yesterday that unless it gets more US tax credits will have to abandon some offshore wind power projects. Nuclear power was the best performing energy segment in August and a relative chart between Orsted (one of the world’s largest offshore wind developers) and Cameco (one of the world’s largest uranium miners and nuclear power technology providers) reveals the big shift in sentiment. Our view remains positive on nuclear power as we see policymakers coming to the conclusion that nuclear power is the only zero-carbon large-scale high energy density solution to significantly increase baseload electricity. Given the installed capacity of solar modules this year it looks more and more certain that solar will be the long-term winner among the renewable energy sources.