Why is Norway's $1 Trillion Fund Dumping Oil Stocks?
Norway operates one of the world's biggest sovereign wealth funds (SWF). The fund manages the revenue the country receives from Norway's oil and gas resources in the North Sea. At the end of 2018, the fund was worth a staggering NOK 8.25 billion which is more than USD 1 trillion.
After a recent review, the fund shocked the market after announcing it will dump investments in firms which explore for oil and gas. Many analysts are saying this shift in strategy is a huge statement regarding the future of fossil fuels. In this article, we explore everything you need to know about the fund's decision and its impact on some of the world's biggest companies.
What Is Norway's Sovereign Wealth Fund?
Norway's sovereign wealth fund is part of the Government Pension Fund of Norway and is most commonly referred to as the 'oil fund'. This is because its aim is to invest the revenues of Norway's oil and gas resources in the North Sea that were discovered in 1969.
The fund has small stakes in more than 9,000 companies across 73 countries. Investments include well-known companies such as Apple, Microsoft, Samsung, Shell and BP. In fact, the fund is so large it holds 1.4 per cent of all the world's listed companies.
Why Is The Fund Dumping Oil Stocks?
After a review of the fund's holdings, Norges Bank - who manages Norway's sovereign wealth fund - advised the government to reduce its exposure to the energy sector. As Norwegian finance minister Siv Jensen said in a statement, the goal of divestment is to "reduce the vulnerability of our common wealth, to a permanent oil price decline". As Western Europe's biggest oil and gas producer, the country's fortunes are heavily linked to petroleum.
While the government says the decision is not about the future price of oil many analysts say the shift in strategy is hugely important. After all, in 2015 the fund made a decision to divest away from coal mining companies. Now the fund is seen as moving away from fossil fuel companies.
In fact, the fund is planning to exit all oil and gas exploration companies. These include the likes of Tullow Oil and Premier Oil. However, the fund also announced they will only retain stakes in large fossil fuel companies which have renewable units - including their 2.4% holding in Shell and 2.3% holding in BP - as the fund believes they are well positioned to lead the green energy revolution.
It is a clear sign - from one of the world's biggest investors - that renewable energy is the next big thing and energy companies who are not involved in it, may see an exit from global investors.
Trading the Impact of Norway's Decision
While the decision is yet to be fully debated and signed off in parliament, some oil stocks have already started to struggle. Even though the fund has already announced that any divestments would take years, sentiment has already turned negative as investors start to make changes in their portfolios.
For example, shares in Tullow Oil - a leading oil and gas exploration company - have struggled to gain any momentum in recent years, as its price chart shows below:
Source: Admiral Markets MT5 Supreme Edition, TLW, Monthly - Data range: from July 1, 2003, to March 18, 2019, accessed on March 18, 2019, at 3:37 pm GMT. - Please note: Past performance is not a reliable indicator of future results.
Many traders and investors would view the price chart and determine the stock is 'cheap', relative to the overall energy sector. In this instance, it is cheap for a reason - investors no longer see growth in the fossil fuel sector.
However, if we look at the share price of a company such as Vestas Wind Systems - the largest seller of wind turbines in the world - it paints a very different picture:
Source: Admiral Markets MT5 Supreme Edition, VWS, Monthly - Data range: from August 1, 2003, to March 18, 2019, accessed on March 18, 2019, at 3:45 pm GMT. - Please note: Past performance is not a reliable indicator of future results.
Is it a coincidence that as oil and gas exploration company Tullow Oil's share price crashed from 2011, shares in renewable energy company Vestas Wind Systems rallied higher - and have continued to do so? There is a landmark shift happening right now in the portfolios of the world's biggest investors.
Conclusion
It is clear to see there is a major shift happening within the energy sector at this very moment in time. This landmark change will now be highlighted in financial media more and more thanks to the actions of Norway's sovereign wealth fund. As global investors reposition their portfolios - is it something you can afford to miss out on?
Fortunately, with Invest.MT5 you can access 15 of the largest stock exchanges in the world, with free real-time market data, premium market updates and trading fees starting at just $0.01 per share.
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