Sustainable equity: Oil imbalance paves way for electric vehicle supply chain growth

Despite a momentary dip in electric vehicle (EV) sales, projections indicate a significant increase in the overall fleet size to a level expected to contribute to a halt in the growth in oil demand by the end of this decade. This anticipated shift is likely to coincide with a considerable rise in oil supply, which would create an imbalance in the oil market, support the electrification of transportation, and lead to investment opportunities within the wider EV supply chain. The lull in sales, coupled with the excitement around artificial intelligence (AI), has certainly taken the spotlight away from EVs but we see it as offering meaningful long-term opportunities in the sustainable equity investing space.

EV sales blip

According to the BloombergNEF (BNEF) annual Electric Vehicle Outlook (EVO), EV sales projections have been reduced by 6.7 million through 2026. Further, the EVO report noted that while the demand deceleration isn’t universal across countries¹ – and EVs will be supported slightly by the resurgence of plug-in hybrids (PHEV) – only a few Nordic countries (Norway and Sweden)² and the state of California are on pace to eliminate passenger vehicle fleet emissions by 2050.

BNEF analysts noted that some markets are experiencing a “significant slowdown” and many automakers have pushed back their EV targets as a result, with the window for achieving net-zero emissions in road transport “closing quickly”.

However, despite the slowdown in EV sales, overall, the industry appears to be on track to deliver sustained fleet growth. In fact, six of the 10 largest EV carmakers in the US have seen sales increase between 56% (Hyundai-Kia) to 86% at Ford.³

General Motors seems poised to lead the surge in EV expansion in the US, with the Detroit-based carmaker having pledged to electrify several of its major models. This lineup includes an Equinox SUV priced at US$35,000 and its counterpart, the Blazer (US34,500), in addition to the Silverado (US$96,495) and GMC Sierra (US$ 99,495) electric trucks.

Helping to fuel such growth, EVs can be more affordable than Internal Combustion Engine (ICE) vehicles over their lifetime due to lower fuel and maintenance costs with fewer engine parts to go wrong.⁴ The different power train of an EV has advantages that can offset higher upfront costs.⁵ A 2018 University of Michigan study found that the average cost to fuel an electric car was US$485 a year, compared to US$1,117 for a gas-powered vehicle. Additionally, as production volumes increase, and battery technologies mature, prices are likely to equalise with ICE vehicles.⁶

Oil imbalance

The forecast growth in EV sales could ensure that oil demand growth stops by the end of the decade, with the oil market imbalance exacerbated further by a surprising amount of supply growth.

According to the International Energy Agency’s (IEA) annual medium-term outlook, global consumption will “level off” at 105.6 million barrels per day – 4% higher than last year’s level – due to rising EV sales, and improved fuel efficiency.⁷

Running parallel to this, the IEA noted that oil production capacity continues to climb, with supply rising by a “staggering” eight million barrels per day higher than demand by 2030. This may leave global oil supply with the largest level of spare output since the Covid-19 lockdowns, the IEA added.

The IEA report noted that as the pandemic rebound loses steam, clean energy transitions advance, and the structure of China’s economy shifts, growth in global oil demand is slowing down, with rising oil supplies potentially weighing on prices through the end of the decade.

Global oil demand is projected to increase over the next few years, according to the IEA, with an anticipated growth of approximately 4 million barrels daily by the decade’s end. This rise is attributed to economic growth in countries like India and China, alongside increased consumption by the aviation and petrochemical sectors.

However, in developed nations, the consumption of oil is expected to continue its long-term downward trend, decreasing from last year’s 46 million barrels per day to 43 million by 2030 — marking the lowest consumption level since 1991. The report also suggests that oil demand in China will level off by the decade’s end, reaching around 18 million barrels daily. Further, a broadening of carbon-related taxes is expected, with emerging market economies, including China, looking to expand their respective national carbon markets.⁸ If carbon prices rise as a result, oil prices could become relatively more expensive over time than electricity per mile travelled.⁹

Riding the electrification wave

These prevailing and converging trends offer a supportive narrative for sustainable investing, particularly within the broader EV supply chain, including mining, automotive technology suppliers, battery manufacturers, and semiconductors and system solutions providers, among others.

Suppliers are also set to benefit from the increasing electrification of cars in general – i.e. combustion engine cars having more electric technology to make them more fuel efficient. Put simply, as electrification increases so too does the demand on suppliers’ products.

A significant transition is happening in the realm of EVs, with 31 nations having exceeded a critical threshold: the point at which EVs constitute 5% of new car sales.¹⁰ Crossing this milestone indicates the beginning of widespread acceptance, a phase after which there tends to be a swift shift in technological preferences towards EVs, which could potentially benefit automakers and their suppliers, including companies such as TE Connectivity, Aptiv, Texas Instruments, and Infineon, among others.

Electrification is a key theme for investors to consider and one that is at the heart our approach to sustainable investing. It is also part of a broader investment theme that we call the digitalisation, electrification, and decarbonisation (DED) nexus. This theme is in action across all parts of the global economy since we need to electrify and digitise in order to decarbonise.

While we haven’t invested in many EV manufacturers, as we see that market as being quite a crowded space with a lot of competition with many incumbents sitting alongside new entrants, we do see many interesting opportunities for investors in the value chain – the companies making the enabling technologies. Here we see attractive valuations and long-term secular growth trends that mirror those seen within areas of high performance, such as computing and AI. For these reasons, we have maintained our exposure to the broader EV value chain and remain excited about investment opportunities in this area of the market.

References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

There is no guarantee that past trends will continue, or forecasts will be realised. Past performance does not predict future returns.