The future of oil trading: How environmentalism will disrupt crude oil markets in the next 5 years

Introduction

• Oil trading today
• The problem with oil
• The green machine
• What are the alternatives?
• Which companies are leading the way?
• What it means for traders
• The bottom line

Key takeaways

• Renewable energy will account for 80% of the world’s energy generation by 2030.
• It's been a bumpy path – but soaring profits for the oil industry plus government subsidies are helping the transition to green energy.
• Traders will need to keep on their toes and look for new opportunities in the energy markets.

If the future is green, what about so-called ‘black gold’ – US crude oil?

The world is embarking on an epochal transition from fossil fuels to green energy. Change is needed to avert the worst effects of climate change. However, the major societal and financial impact means the transition will be bumpy, especially as a political backlash against environmentalism and the green revolution gathers pace.

While the planned obsolescence of fossil fuel threatens to create new rust belts, its influence on oil trading will be historic. The International Energy Agency predicts that renewable energy will make up 80% of the world's power generation by 2030.

That implies brent and US crude oil trading will diminish on the way, while also suggesting a disruption in trade flows, an increase in structural volatility, and a fundamental alteration in commercial and national relationships. Further search points to reaching peak oil by 2030.

Across the intervening few years, the price of oil may govern how the industry evolves until its presumed reduction. Green energy technologies have been banking on sharp increases in fossil fuel prices to make them increasingly competitive. But that “economic case” may be lost if the ramp-up in fossil fuel prices doesn’t materialize.

Indeed, there is strong evidence that the transition to renewable energy has stalled in recent years as the use of oil and other fossil fuels continues to dominate total energy consumption.

Oil trading today

“A recent Deloitte survey showed 93% of oil and gas executives are upbeat about the industry.”

It’s fair to say that the oil trading industry is used to price volatility and supply disruptions.

Current issues like geopolitical and trade stress, as well as a global economic downturn, are par for the course. But they have exacerbated underinvestment in previous years as the industry continues to battle with energy security and relatively new low-carbon transition plans.

Record cash flows for oil and gas companies in recent years have helped - a recent Deloitte survey showed 93% of oil and gas executives are upbeat about the industry going forward.

Continued exceptional profits this year have seen the industry increase investment in renewable energy, though healthy balance sheets have created more opportunities for crude oil and gas projects.

This is borne out by a report by REN21 which says 80% of our energy consumption in the last decade comes from fossil fuels. In fact, since energy demand is rising, the world is consuming more fossil fuels than ever before.

The problem with oil

The Russian invasion of Ukraine has accelerated a pivot by oil and gas companies.

Momentum has moved away from phasing out natural gas to cutting emissions while investing in cleaner alternatives.

Other issues around the energy transition include supply chain constraints and the timeliness of new regulations which could be impacted by upcoming elections.

Current geopolitical turbulence will cloud the supply and demand picture for the foreseeable future. But there’s no doubt oil companies continue to face pressures to upend their business models without upsetting their shareholders.

Markets will also distinguish between companies that appear to take climate change more seriously. This could see oil majors break themselves up into separate green and fossil fuel businesses to better expose the value of their green ventures.

“Silicon Valley and the mega-cap tech companies are leading the way in finding new, less volatile ways to procure energy”

The green machine

Increasing commodity prices and worries about energy security have forced companies to diversify supply and speed up the green revolution.

According to the International Energy Agency (IEA), renewable energy investment by oil and gas companies has risen by an average of 12% each year since 2020. The agency forecast it accounted for roughly 5% of total capital expenditure spending last year, up from less than 2% in 2020.

Soaring profits and higher cash flows for the oil and gas industry as well as supportive government policies are helping the shift to renewable energy.

This transformation is creating unique opportunities and challenges for new and incumbent players alike. However, many nations have recently enacted new subsidies for fossil fuels whilst keeping regulatory frameworks in place which support centralised, high-carbon energy production and consumption.

What are the alternatives?

There is an interesting split in the oil industry across the globe - with European oil companies adopting a markedly different strategy to their US counterparts.

The former are being more aggressive by moving into wind power, solar power, and batteries - explicitly away from oil production. This contrasts with US companies who see themselves as oil producers and are focusing their attention on reducing carbon emissions.

Hydrogen, carbon capture, and technological solutions around energy efficiency are some of the alternative ways that these companies are developing.

Which companies are leading the way?

One of the largest renewable energy producers in the world is NextEra Energy (NEE), with a market cap of more than $137 billion.

NextEra leads the charge in solar and wind energy production, generating about 30,000MW from both sources.

General Electric (GE) is also widely recognized for its innovations in power and renewable energy. The 130-year-old conglomerate has made huge strides in green energy solutions and is at the forefront of wind energy tech.

You can trade both these companies today with zero commission with FXTM.

What it means for traders

The transition to green energy and alternative energy sources will be messy – influenced by factors both economic and political.

Traders will need to be more opportunistic with strategies as the world continues on the bumpy green road away from fossil fuels.

Deciding what products are best to trade more frequently as opposed to longer-term investments will be important, especially with the oil futures market which could become more volatile on short-term headlines.

As renewable energy transforms the energy space, the “big five” synonymous with energy for decades may be surpassed by a new set of brands. Silicon Valley and the mega-cap tech companies are leading the way in finding new, less volatile ways to procure energy - something traders should keep an eye on.

A third essential tip is a focus on big calendar risk events which may impact both fossil fuel and greener energy markets. For example, future COP meetings and decisions will be a long-term driver for the speed of the green transition.

The bottom line

Recent events including the Ukraine war have forced governments to backtrack on some of their environmental goals.

The world is going to be dependent on oil for a longer time than many assumed, with governments asking oil companies to produce more energy through fossil fuels.

Indeed, a recent survey by Pew Research found that 35% of Americans think the US should never stop using fossil fuels to meet its energy needs.

We could be in for a slow, cautious reduction (or reorientation) of fossil fuels as oil companies are effectively forced to move over to renewables.

One thing is for certain. The world will need to become more energy efficient and better at using the supplies we have over the next few years – and that means markets will have to catch up.

Oil Crude Oil