Oil be damned: commodity investing, green energy and gold

Susannah Streeter: Hello, and welcome to Switch Your Money On. I’m Susannah Streeter – the Head of Money and Markets here at Hargreaves Lansdown – and, as usual, I’m with Sarah Coles – Head of Personal Finances.

Sarah, my feet have just touched the ground after a busy couple of weeks covering the recent market volatility combined with the party conferences – and, here, in the UK. I took what seemed to be like an interminable train journey via Newport – Abergavenny – Hereford – Chester – to get to the Labour Party Conference in Liverpool – on a very packed carriage – on what must have been the hottest day in October for years!

Sarah Coles: Yeah – the weather was really all over the place in October! – but you were taking the temperature of the mood in the room at the conference too.

Susannah Streeter: Yes, I certainly was. I was there listening to the speech by the Shadow Chancellor – Rachel Reeves. There was a real bunfight to get into the hall.

It was really interesting to hear about her plans for a ‘National Wealth Fund’ to kickstart growth and invest in a whole range of green energy initiatives from battery plants to clean steel plants. It would have a target to leverage £3 of private sector funding from every £1 it invests – and I think it was a bit of a coup that she won the endorsement of the former Governor of the Bank of England – Mark Carney – and he said in a video message played out in the hall that it was time to ‘Put her ideas into action.’

One of those ideas is liberalising planning laws to make it easier to speed up infrastructure developments, but there is still plenty of scepticism around about how much this will really move the dial – and there wasn’t really that much detail about spending plans, other than that Labour would borrow more to invest, but only if it meets fiscal rules. Labour, also, clearly nervous about the potential of upsetting the bond markets with plans of unfunded splurges.

Sarah Coles: So, that’s not really a surprise, given the recent turmoil – and that saw bond prices fall sharply and yields shoot up. So, that was sparked by data in the US – which indicated the labour market is still super-strong there – and that’s led to any hopes of interest rate cuts being pushed way back on the horizon. So, yields did inch-down again, but concerns are still lingering.

Susannah Streeter: It’s been quite a ride for oil prices as well over the past month – with a barrel of Brent Crude appearing to head towards $100 dollars a barrel – before performing a U-turn and falling back, and then heading sharply upwards again following the troubles with the Israel-Hamas conflict.

Of course, our thoughts are with anyone caught up with this terrible tragedy – which is, of course, anyone’s primary concern – but it has also impacted oil prices.

Sarah Coles: Yes – so oil prices are super-sensitive. They’re being pushed down by investor concerns about growth and the global economy, and then pushed upwards by tightness of supply – and then worries about possible further repercussions in the Middle East. So, they’re incredibly reactive to each piece of news.

Susannah Streeter: Given the dance-around in oil prices – and the focus on the green transition amid strange weather and worries about climate change – in this podcast, we’re focusing on energy and commodities in an episode we’re calling ‘Oil Be Damned.’

Sarah Coles: We’re gonna speak to Sophie Lund-Yates – our Lead Equity Analyst – about companies to watch as oil fluctuates and countries accelerate investment in the green transition.

Susannah Streeter: And we’ll have a chat to Nick Van Dijk – CEO of Oort Energy – a company investing in one energy alternative – green hydrogen.

So, Nick – has the time come for hydrogen, d’you think?

Nick Van Dijk: Well, hydrogen’s already a ubiquitous molecule – so it’s used a lot already – but the time has come for green hydrogen. We need to make that change from using fossil fuel-based hydrogen to green hydrogen.

Sarah Coles: That’s great – we look forward to delving more into this later in the podcast.

We’ll also hear from Emma Wall – our Head of Investment Analysis and Research – who’s been speaking to a Fund Manager focused on ‘Commodities.’

Susannah Streeter: So, let’s focus on the oil price right now – it’s been a bit all over the shop recently.

Near the end of September, the psychologically important level of $100 a barrel appeared to be in sight of Brent Crude.

The International Energy Agency expects demand to keep growing this year. It’s been boosted by buoyant airline sales and strong summer travel – the increased use of oil for power generation – and a surge in activity in the petrochemicals industry – particularly in China – but demand is expected to weaken next year as the post-pandemic rebound fizzles out – weaker economic conditions drift in – and new electric vehicles become more popular.

Sarah Coles: Yes – and worries about interest rates staying higher for longer have also led to concerns about the US economy heading for a more difficult banding – which, of course, then weighs down on prices.

The worry is that, if employers are still finding it hard to recruit, then wage growth will stay strong, and inflationary pressures won’t ease. It means interest rates could stay higher for longer, which could make life a lot tougher for companies and consumers – and, of course, this would then mean less demand for oil – which the IEA already expected next year.

Susannah Streeter: However, the Israel-Hamas conflict led to another spike in the price of oil. The Israeli Government has warned that it could be a long and difficult time ahead, which has led to concerns over repercussions across the Middle East – it would be desperate for people in the region and would also impact the supply of oil.

Already – at October’s OPEC meeting, Saudi Arabia and Russia signalled they would continue with their production cuts – moves which are also keeping upwards pressure on prices.

Sarah Coles: So, as oil heads higher again, it’s fuelling worries about inflation because, of course, oil prices feed into the supply chain across the board – so that’s everything from the cost of farming to production prices – transport – and even the energy use of retailers at the end of the process.

So, we had seen inflation ease off, but there’s a risk that oil prices could reignite higher inflation – putting even more pressure on peoples’ pockets.

Susannah Streeter: So, the economy remains incredibly vulnerable to oil prices, and part of the solution for that is a transition to new, greener forms of energy. It’s why there’s been so much focus on the transition to net zero by 2050, when we’re aiming to be no longer adding to greenhouse emissions.

In September, an awful lot of the UK’s net zero pledges were pushed back, including a five-year delay in the sale of new petrol and diesel cars to 2035. While the ban on new gas boilers by 2035 remains in place, the Government introduced exemptions for lower income households – and the target that all rental properties should have an energy performance certificate of ‘C’ or higher from 2025 has been ditched – although the Government says that net zero targets will still be hit by 2050.

Sarah Coles: So, there’s a lot of change for energy and oil companies to adapt to – so it feels like a good time to bring in Sophie now.

But, first things first, we should probably start with the fact that oil giant, BP’s been in the headline a fair bit recently.

So, Sophie, what’s going on?

Sophie Lund-Yates: Yes – BP hit the headlines after it emerged that CEO – Bernard Looney – would be stepping down with immediate effect after he admitted to misleading the Board over disclosures relating to personal relationships with colleagues.

So, the group’s Chief Financial Officer is going to be taking the helm on an interim basis while the search for a permanent replacement is underway.

Susannah Streeter: What does all this mean for investors? It’s a lot more uncertainty, isn’t it?

Sophie Lund-Yates: An unexpected change of leadership is never ideal. It, essentially, increases uncertainty and leaves questions unanswered, especially around strategy and things like that. Looney has made big strides in driving the group’s green energy plans forwards.

Until a successor emerges, it’ll be difficult to call what direction BP will take at this pivotal time – and any prolonged uncertainly is likely to weigh on investor settlement – but, overall, the market’s reaction to this change has been fairly muted. It seems that investors are more concerned about important broader issues – including the oil price and long-term green strategies.

Sarah Coles: Thanks, Sophie. So, speaking of the oil price – the FTSE 100 holds another oil major that’s been watching developments there closely, doesn’t it?

Sophie Lund-Yates: It does indeed. We’re, of course, referring to Shell – it’s a leading supplier of Liquified Natural Gas – or LNG.

We think the outlook for this part of Shell’s business remains positive – and Shell’s planning to grow sales volumes in this category between 20 and 30% by 2030.

Another thing to keep in mind – where Shell is concerned – is that strong financials enable it to self-fund significant organic investment – but, with a big chunk of cashflows ringfenced to the shareholder returns, there are some concerns as to how long this can continue.

We’ve already seen this year’s CapEx guidance trimmed in the face of challenging trading conditions. To reduce its reliance on oil and gas-based revenues, investment levels will need to remain high for the foreseeable future.

Susannah Streeter: So, Sophie, who else have you been looking at in this space?

Sophie Lund-Yates: I’ve had a look at ExxonMobil – which is another very recognisable oil and gas major. In fact, it’s the largest independent oil and gas group in the world. It’s in the news at the moment because it’s in advanced talks to buy one of America’s leading fracking companies, called ‘Pioneer Natural Resources,’ with the deal worth around $60bn. So, just absolutely huge sums.

Exxon made profit of just under $56bn last year – so it has some firepower to throw at big acquisitions like this.

Sarah Coles: That’s not the only reason it’s been in the news, though, is it?

Sophie Lund-Yates: Unfortunately not. Central to this deal is the group’s shale oil and gas business, and the boss of this unit has been arrested because of sexual assault allegations. This news has more than wiped out recent gains on the group’s valuation.

This raises some governance questions – with governance, of course, being the ‘G’ in ‘ESG’ – and this is far from the only ESG consideration – and investors need to be mindful of. Future-proofing oil and gas businesses depends on the successful execution of renewable strategies.

Looking at the UK market, Shell’s efforts here have a lot to be desired – and, looking further ahead, we have to consider that oil – as part of the energy mix – is going to be declining – which is where we need to chat to our ESG Analyst – Laura Hoy.

Laura, what’s going to replace oil and gas?

Laura Hoy: Thanks, Sophie. You are absolutely right – countries around the world have committed to meeting net zero by 2050, and that will mean demand for oil will fall substantially over the next 20 years.

Renewables and efficiency improvements are expected to pick up a lot of that slack, but there are other areas that are sometimes overlooked with huge amounts of growth potential.

Now, one of those areas is hydrogen – which we’re going to hear about later – but another energy source worth talking about is nuclear.

Now, there is a lot of controversy when it comes to nuclear – and not for no reason. While accidents are rare, those that do happen can be catastrophic – and it’s also costly and time-consuming to get new plants online – but, with that said, global investment in nuclear power is going to roughly double to hit net zero in 2050 – and there are a lot of advantages to nuclear, particularly when it comes to lowering emissions.

Once plants are online, they’re cheap to run, and they come with very low emissions. It’s also a relatively reliable source of energy. Whereas solar and wind depend on the elements, nuclear could offer a baseline of uninterrupted energy.

So, the bottom line is that nuclear is likely to be at least a small part of the future energy mix in a net zero scenario.

Sophie Lund-Yates: So, looking at nuclear energy as a growing industry, it makes sense for me to briefly touch on Rolls Royce.

While the vast majority of Rolls Royce’s business rests on its manufacture and servicing of long haul aircraft engines, it is making increased inroads into nuclear. So, Rolls Royce’s vast infrastructure in technology means it’s in a reasonable position to develop technology for a new generation of small nuclear power plants in the UK. It’s also recently cleared the first hurdle and been selected by the UK Government as one of a small handful of companies being picked to develop small modular nuclear reactors.

As I said, we’re in very early days, but this is certainly an exciting area to watch – and one that investors shouldn’t ignore.

Sarah Coles: Thanks, Sophie, and Laura. There’s clearly not just an implication for oil companies from the energy transition, but for all sorts of businesses.

Susannah Streeter: Of course, as oil prices rise, we’re often reminded that demand for the black stuff won’t have a floor under it forever.

The global commitment to reach net zero by 2050 suggests we’re all going to undergo a major energy transition over the next few decades, and oil will become a much smaller part of the overall mix.

When I think about net zero, renewables like wind and solar are the first things to spring to mind.

Sarah Coles: Yes – me too – and that’s for good reason.

So, the International Energy Agency predicts that some 70% of our energy will come from wind and solar if we reach net zero in 2050.

Susannah Streeter: But that last 30% is worth exploring. It’s a place where some of the most exciting investment opportunities are blossoming.

One of these is hydrogen. It’s only a tiny percentage of the future overall energy mix – but, in terms of growth, the opportunity is enormous.

The IEA predicts that global hydrogen use will increase by almost five times between 2020 and 2050, but not all hydrogen power is created equally. Depending on how it’s made, it can have a varying impact. If net zero is the aim, then green hydrogen is an important part of the puzzle.

So, this is a really good time to bring in Nick Van Dijk – CEO of Oort Energy – a company that’s making green hydrogen a possibility.

Welcome, Nick – so, first of all, can you explain what green hydrogen is – how is it currently made?

Nick Van Dijk: Hydrogen gas, itself, is not coloured. We often refer to hydrogen as ‘Green hydrogen’ – ‘Blue hydrogen’ – ‘Grey hydrogen’ – ‘Brown hydrogen’ – and even ‘Turquoise, yellow, or pink hydrogen.’

When we talk about ‘Green hydrogen,’ specifically, we really mean hydrogen produced from water using green electricity, such as solar or wind power. This process is known as electrolysis. Electrolysis is an electrochemical reaction to split water into its components of hydrogen and oxygen – and its chemical reaction is just the use of electricity to perform a chemical reaction.

Electrolysis, therefore, uses electricity to split water into hydrogen and oxygen – and, importantly, emits no carbon dioxide in the process. This is opposed to, say, grey hydrogen – which is produced from the fossil fuel natural gas – and, ultimately, produces a lot of carbon dioxide as a biproduct – contributes to climate change.

What we do at Oort Energy is we manufacture the equipment that makes green hydrogen.

Sarah Coles: So, green hydrogen sounds like a sort of an emerging product – so are there any industries where it’s already established, or is it part of a mix in lots of industries?

Nick Van Dijk: So, hydrogen, itself, is already used ubiquitously.

So, green hydrogen – it’s an emerging product – but the two main uses of hydrogen today are the production of fertiliser and the production of chemicals. These are behind closed doors, so we don’t often see them.

The manufacturer of fertiliser begins with a chemical reaction known as the ‘Haber-Bosch Reaction.’ The majority of that fertiliser is made from using hydrogen made from fossil fuels. This produces the global warming gas, carbon dioxide, of course.

So, we’re gradually moving from grey hydrogen to green hydrogen – and moving fertiliser production to green hydrogen would make a significant impact on global carbon dioxide emissions – but, importantly, it requires no change in lifestyle. So, we could use the same amount of fertiliser – eat the same food.

Susannah Streeter: So, you’ve talked there about the fertiliser industry – which other industries are you expecting particularly high growth?

Nick Van Dijk: The most obvious example of this for the future is in the Transport sector.

Hydrogen can be converted back into energy to power, say, a bus or a truck. The bus or truck can fill up in minutes – so, essentially, that bus is running on wind or sun – just not directly. Hydrogen may be a better option for some applications in the future – particularly for commercial applications, where the advantages of long-ranges and fast-fuelling is important.

Hydrogen, itself, is a natural reductant – this means it can be used in industries, such as steel manufacture.

Actually, steel manufacture currently uses carbon or coke as a reductant – and that’s what’s used to make steel – but, of course, it releases vast quantities of carbon dioxide. Green hydrogen can really be used to clean out that steel manufacture and eliminate those emissions.

The challenge, of course, is coke is very cheap, and the production of green hydrogen is somewhat more expensive – but, just as energy and wind power has reduced in price, green hydrogen will come down in price as it becomes more common.

Sarah Coles: Are there any sectors where hydrogen isn’t an option?

Nick Van Dijk: Hydrogen is an important part of the solution to help solve the climate change problem, but it’s only part of the solution – it’s still very early days. But let me give you an example where – at least, in my opinion – hydrogen is not necessarily the answer.

There’s a lot of work looking at burning hydrogen to produce heat. Heating, as a sector, is very difficult to decarbonise – particularly as gas is used to heat homes and commercial buildings.

Now, that gas can be changed for hydrogen gas – using the same pipework – and burnt in the same way – albeit it a slightly different burner is needed – but, essentially, it’s the same process.

On the face of it, this looks like a great solution. Instead of burning natural gas with the associated carbon dioxide emissions, we burn hydrogen with no emissions. However, if we go back to looking at that providence of hydrogen, it only makes sense if we use green hydrogen – and green hydrogen comes, ultimately, from renewable electricity.

Actually, my opinion is I think there are better ways to heat your home using electricity directly than converting to hydrogen and burning that hydrogen.

Susannah Streeter: Fascinating to talk to you, Nick. Thank you so much for coming onto the podcast – it’s going to be really interesting to see how the energy mix develops over the coming years.

So, let’s bring in Emma Wall now – our Head of Investment Analysis and Research – who’s been speaking to George Cheveley – Manger of the Ninety One Global Gold Fund.

Emma Wall: Hello, George.

George Cheveley: Hello, Emma.

Emma Wall: So, we’re talking today about commodity prices – not least oil, which has been creeping back up again – in part because of tensions and conflict in the Middle East – and in part because of a number of different macroeconomic factors – and, if we play this through, rising oil prices over the last 18 months have flown through into inflation across the globe – rising prices – ‘cause oil, of course, is an input cost – but then, equally, when there is uncertainty and volatility, it also has an impact on gold – this is what we’re going to narrow-in on – as a perceived safe haven – and we saw this at the beginning of the calendar year, and we’re beginning to see this again – at the moment – aren’t we?

George Cheveley: Yes – that’s correct – and it’s very easy to say gold is a safe haven in times of uncertainty, but it also can be very volatile as a result of that. There are several factors actually impacting on gold prices at the moment – and safe haven is one of them, but not the only one.

Emma Wall: And the perception of gold as a safe haven – and I think ‘Perception’ – as you’ve eluded to, yourself, there – is a really important word – is because it is universally understood and valued as a commodity – and because it’s not so linked to other parts of the global asset mix – but, as you’ve said yourself, it is volatile in its own right, and it is driven by factors which aren’t always forecastable or controllable.

George Cheveley: Yeah – and one of its simplest and main functions of gold is its liquidity. So, gold, itself, is one of the most liquid asset classes you can get involved in. The value of gold traded in any particular day can be almost as much as the whole S&P 500 – and that means, when people are looking for places to put their money – it’s very easy to get in – it’s also very easy to sell when in the midst of a crisis. In the absolute middle of a crisis, you will see gold go down, initially – though it tends to recover very, very quickly – and that’s really just people wanting to access liquidity.

Emma Wall: What are the factors that are driving the gold price at the moment?

George Cheveley: Well, clearly, we have a conflict in the Middle East – and that was one of the factors last week – but it came at a time when a lot of technical funds were very short. We’ve seen gold prices fall in the preceding week or so quite sharply – and that was really around the markets perception that the Fed – back in September – had really changed its tune and was looking for rates to stay higher for longer – and, after the Open Markets Committee Meeting, we saw those minutes which suggested that.

What happened, of course, was the bond markets reacted – are sold off, and we saw yields rise in the bond markets quite rapidly – and then, last week, the Fed started to signal that, in fact, the bond markets were doing their job for them and had finally taken heed of the Fed’s advice that rates needed to be higher for longer – and that actually, ironically, meant the Fed doesn’t – or, certainly, hinted that it would not need to keep raising rates. So, then we had the reverse effect.

In the end, ‘Do we know what’s gonna happen?’ – ‘Not really’ – but what this type of action – this volatility where you see the market move one way and then, very quickly, the other – does hint that we’re at some sort of inflection point, and I think – as the market’s been trying to see all year – is ‘When is the Fed gonna pause – when’s it going to possibly cut rates?’ – and I think the action of the last month shows that we’re getting very close to that point.

Emma Wall: And then – obviously, history is no guarantee of the future – and none of us have a crystal ball! – but, looking at other periods where we have been in a similar point in the cycle – what next for gold, then – if it is paused from here – if it is even ‘Pivot’ from here – on rate policy?

George Cheveley: The history isn’t too much help in this case because there are very few historical precedents for this, but one would simply say, if we are going to see a pause in rate rises – which seems to be coming – and then, if we do see a slowdown and rates come off – that is generally a positive environment for gold, and we would expect to see that – particularly if the dollar starts to weaken. We’ve had a very strong dollar for three months, but it’s paused in the last few weeks – that could also be very supportive for gold.

Emma Wall: George, thank you very much.

George Cheveley: Thank you, Emma – thanks very much – goodbye.

Susannah Streeter: That was Emma Wall, there, talking to George Cheveley – Manger of the Ninety One Global Gold Fund – and, please remember, those are the views of the Fund Manager and are not individual stock recommendations.

You’re listening to Switch Your Money On from Hargreaves Lansdown – and, now, to end this episode, we have a quick statistic – looking at just how higher oil prices have affected petrol prices.

So, the highest ever petrol price was in July last year, when petrol hit 191.5 pence a litre – but, Sarah, can you guess how much of that was made up by tax?

Sarah Coles: Well, I know the levels are really shocking – ‘cause I know there’s fuel duty and there’s VAT as well – so I think it’s getting on for about half of it, isn’t it?

Susannah Streeter: Yes – almost – you’re absolutely right. It’s actually between 43% and 44%, so I’m gonna give you that, Sarah.

Sarah Coles: I mean, it is a lot. I’m almost tempted to start riding my son’s moped instead of driving – although I’m not sure I fancy my chances on the country lanes round here.

Susannah Streeter: Yes – I think the bus might be a slightly safer option!

Well, that’s all from us for now – but, before we go, we do need to remind you that this was recorded on October 16th, 2023, and all information was correct at the time of recording.

Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Unlike the security offered by cash, investments rise and fall in value, so you could get back less than you invest.

Susannah Streeter: Yes – this is not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value – or price of any investment – and investors should form their own view on any proposed investment.

Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research. However, HL has put controls in place – including dealing restrictions, physical and information barriers – to manage potential conflicts of interest presented by such dealing.

Sarah Coles: You can see our full, non-independent research disclosure on our website for more information.

So, all that’s left is for me thank our guests – Nick, George, Sophie, Laura, Emma, and our producer, Elizabeth Hotson.

Susannah Streeter: Thank you so much for listening – we’ll be back again soon – goodbye!