Q1 2022 outlook: Fuelling the energy crisis

Q1 2022 outlook: Fuelling the energy crisis

Steen Jakobsen
Chief Investment Officer

Executive summary

Our outlook for early 2022 explores the overriding risk of an energy crisis developing this year due to years of underinvestment in mission-critical baseload energy—the fossil fuels and nuclear energy that are still the overwhelming energy inputs into our economy. The climate agenda and focus on reducing CO2 emissions is the right one for the long-term future, but 2022 will be the year in which policymakers discover that the current roadmap toward long-term climate targets is out of touch with reality. Focusing excessively on EVs and the current menu of alternative energy options while neglecting baseload fossil fuel and nuclear will only lead to an energy crisis ahead. Europe is already at the heart of the baseload crisis and will continue to be so in the coming year. The EU will be the first major economic bloc forced to revamp its energy infrastructure and allow natural gas and nuclear back in from the cold.

In equities, we look at the incredible current under-representation of the energy sector in equities, which makes up a meagre 2.7 percent of the S&P 500 market cap at the end of 2021 versus more than 16 percent at their major peak in 2008 and 10 percent in early 1995. We have also drawn up an inspirational list of some 40 companies across the global fossil fuel, nuclear and new energy landscape. We expect the sector to deliver strong returns in coming years, as market valuations are very stretched in most of the sectors that did well last year.

In commodities, a strong focus in 2022, we look not only at the upside potential for oil and gas, but also nearly every industrial metal due to the metal intensity of alternative energy sources, from wind turbines to EV batteries. The underinvestment that has brought us to the current state of weak supply will continue until ESG standards for lending into mining and upstream oil and gas production are softened. Greenflation will persist as a buzzword in 2022 with further uncomfortable inflation in commodities possibly spreading to the major agricultural products as fertiliser prices are set to spike in the next growing season after this winter’s natural gas crisis. Many don’t realise that much of the fertiliser used to increase the crop yields that are our “food baseload” are produced by stripping natural gas atoms of their hydrogen to produce ammonia compounds; so we even “eat” fossil fuels, in a way.

In the fixed-income markets, the focus this year will be on central banks’ increasingly aggressive stance as they lean against the powerful inflationary pressures that worked up a head of steam in the second half of 2021. Yield curves will likely bear flatten, with policy rate hikes raising yields at the front end of the curve while longer yields struggle to keep pace. The latter will be held down by weak long-term real growth prospects. Long-duration bonds and assets will likely struggle in the year ahead. Investor interest in higher-yielding debt will persist. However, as central banks begin catching up with inflation in their policy moves, higher real rates could spark an eventual widening in credit spreads that dent returns for riskier debt.

In currencies, we look at the likelihood that the Fed will be more or less be forced down a path of hiking rates until something breaks down the road. The USD is likely to remain weak as long as the Fed’s perceived “terminal rate” remains anchored around 2 percent, and as long as the pace of the Fed’s rate increases is sufficiently sedate to avoid a liquidity panic. Elsewhere, we note that 2022 kicked off with extreme divergences in JPY weakness and CNY strength that haven’t been seen since China modified its exchange rate regime back in 2015, severely weakening the renminbi. With much of the world tightening while China seeks some form of domestic easing after crackdowns on the tech and property sectors, the divergence points to a softer renminbi.

Explore Saxo’s products

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)

Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.