Attention rises for energy markets, but volatility remains a problem

Financial markets/economy

Posted by MoneyController on 11.07.2024

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In the Wall Street Journal, Anna Hirtenstein and Caitlin McCabe write about a sector that has increasingly attracted the attention of investment funds, especially hedge funds: the energy sector.

AI's demand for electricity

Within the energy sector, a prominent role is played by electricity. This form of energy can count on at least two important growth drivers. The first is the drive towards the electrification of areas such as mobility, which until not so long ago had been dominated almost exclusively by fossil fuels. The second driver is represented by none other than artificial intelligence: here, the International Energy Agency predicts that electricity consumption will increase tenfold over the next two years.

The volatility of energy markets

But how volatile, and therefore risky, the energy market is. The answer is a lot. In the 'Wall Street Journal', Hirtenstein and McCabe report an interesting comparison by McKinsey: if the price of oil has fluctuated between $73 and $95 per barrel over the past twelve months, using the same proportions (dollars per barrel), energy prices should have fluctuated between sub-zero figures and $850. It therefore becomes clearer why hedge funds in particular are interested in this market: it is both a very volatile and a very complex area of investment.

Gas and electricity prices particularly exposed to extreme events

Of course, it is true that what happened during 2022 (and to some extent also in 2023), when Russia decided to invade Ukraine, was an extreme event: gas reached very high prices in a very short time, and then stabilised again. However, Hirtenstein and McCabe write that market experts - extreme events aside - do not rule out increasing volatility in the market. Moreover, there is no hiding the fact that, although renewables are infinitely less polluting than fossil energy sources, those same clean energy sources have contributed to making electricity more exposed to the risks of bad weather and extreme weather events.

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