The oil rally and low carbon credit performance

12 minute read

Reasonably, after an oil price rally of almost 100% in 12 months, we would expect credits with higher relative exposure to carbon emissions to underperform. But our analysis suggests that the opposite actually is true: even with a steep rise in oil prices, relative low carbon bonds outperformed higher carbon emitting ones.

Oil prices in some parts of the market went to negative levels 12 months ago, and the benchmark Brent crude price had troughed at a level of USD34.74 per barrel by late April 2020. What has since followed has been a remarkable rally, with the price establishing itself in the range of USD60-70. Reasonably, the oil price rally should have led to less carbon-exposed issuers and bonds to underperform during this time.

In the oil price fall of 2019 to Q1 2020, low carbon credits performed very strongly. The question is whether the inverse was true over the past year – we believe not. There has been a brief period of underperformance during February-March 2021, but we still see positive year-on-year performance. On a longer time scale, we actually find correlation between oil prices and low carbon credit performance to be insignificant.

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