This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
The Norwegian fund is currently worth around $1 trillion, having been amassed thanks to the oil wealth conferred on Norway in the North Sea. Around 6% is invested in oil and gas companies. Shares in such firms fell following the announcement, since news of the possible sales would likely put downward pressure on share prices as Norway looks to reduce its stake.
Given that the fund receives money from the sale of Norwegian oil, it is hardly fair to criticise the Norwegians for wanting to cut back on exposure to the vagaries of the oil market, even if it looks slightly odd to be doing this when the price of the commodity has rallied so strongly from the summer lows. Not only is diversification a prudent and well-known policy in investment, Norway will also be looking to worry less about the machinations of Organization of the Petroleum Exporting Countries (OPEC) and the various policy games that surround the price of oil.
The fund’s largest overall equity holdings include billions in Apple, Nestlé, Shell, Alphabet and Amazon. Shell is now likely to depart the list, but as the fund looks to beef up its equity exposure, they will likely end up buying more shares in the other large firms mentioned above.
If the world’s largest oil fund is selling its oil and gas equities, should other investors follow suit?
The answer depends on many factors. Some investors may have an objection to the sector on environmental grounds. Others, like the Norway fund, may already have enough exposure to oil and gas and do not need to add more.
But it does send a signal about the future. Barely a day goes by without a comment regarding electric cars and how they will eventually supplant their internal combustion engine-powered counterparts. Oil is not going to drop out of use entirely, since it will still be used in plastics and other applications.
Its position as the driver of the global economy, however, will diminish, even if much slower than many people, such as Elon Musk, expect. The paroxysms of panic over ‘peak oil’ before 2009, when it was expected that the world would run out of oil long before a substitute could be found, have been replaced by hand-wringing over ‘peak oil demand’. The vast reserves under the Arctic may never be needed, as oil demand continues to fall.
Oil companies, whether those that explore for oil, or pump it, or those that provide services to other oil firms, have been strong performers over the decades. BP and Shell, for example, have, through their dividends, helped fund the retirement of millions of Britons. Such payouts are not going away yet, but for those hunting for income it makes sense not to put all available funds into BP and its ilk, even if the dividends have held up well and are well-covered by cash generation.
Norway’s fund has made an investment decision, and it does not mean that oil stocks are suddenly due a fall, but it sends a message that the world is moving slowly away from its dependence on oil. The replacement technologies are still in their relative infancy, but for those that replace hydrocarbons, and the companies and investors that control them, the rewards will be immense.