Is investing in energy a good idea? Here’s a breakdown of how to do so and why energy stocks could be profitable for resource investors.
Energy surrounds us in our everyday lives, from when we wake up to the time we go to sleep. We use it to light and warm our homes, drive to work, communicate and much, much more.
Different applications require different types of energy. For example, oil and gas are often used for heat, while nuclear reactors use uranium to make electricity. Renewable energy sources like wind, solar panels and hydropower are also gaining traction as ways to generate electricity.
Because energy is so necessary to all aspects of life today, investing in energy is becoming popular. But what kind of energy is the best to invest in? And which companies offer the best return on investment?
To help investors interested in the energy sector do their due diligence, the Investing News Network has put together a brief overview of the oil, gas and uranium markets. All are popular sources of energy today, and may be good investment choices for those who want exposure to the industry.
Crude oil and natural gas are widely recognized as key energy sources around the world, and oil stocks and gas stocks have dominated the energy investment market for a number of decades.
Both oil and gas occur naturally and are classed as hydrocarbons. They are generally found in close proximity to each other deep underground in rock formations; gas and oil companies drill wells to find and extract the fuels.
Those watching the oil space know that prices are often volatile. Indeed, in just the past decade, oil prices have seen an incredible range — among other movements, prices soared past US$140 per barrel in 2008, then crashed steeply from the end of 2014 to the beginning of 2016, dropping as low as under US$30. Oil prices per barrel went on to recover late in 2016, trading between about US$50 and US$75.
Such price swings are the result of a variety of factors, and in this article, Forbes contributor Michael Lynch does a good job of outlining some of them. For example, he notes that oil consumption data is often not reported in a timely manner, and comments that the Organization of the Petroleum Exporting Companies, better known as OPEC, can influence prices. Even the weather can have an impact.
In 2020, COVID-19 wreaked the most havoc on oil prices. Lockdowns placed significant downward pressure on oil demand, even pushing prices into negative territory. Just as the pandemic seemed to be letting up with higher vaccination rates and easing restrictions, oil prices rebounded in 2021 as demand grew faster than supply.
Natural gas prices have also been volatile in the last decade. They leaped in 2008, when they were above US$13 per million British thermal units, and their lowest point of below US$2 came at the beginning of 2016. Then, between 2017 and the lead up to the COVID-19 pandemic, gas prices averaged around US$3.
In April 2020, gas prices followed the same downward trajectory as oil prices, dropping to a low of US$1.65. As with oil prices, gas prices are affected by a number of factors. However, weather has more of an effect on gas prices than it does on oil prices. In 2021, natural gas prices also shot up on increasing demand and supply challenges.
Given that volatility, investing in oil and gas can be daunting. But for some investors it’s an exciting prospect — after all, while both spaces have seen incredible lows in the last 10 years, they have also seen incredible highs. Click here to learn more about how to invest in oil, and click here to learn more about gas investing.
It is a cleaner and more efficient source of energy than oil and coal, and, as noted, is used to power nuclear reactors. The production of nuclear energy itself produces no carbon dioxide, although mining and refining uranium does produce carbon emissions.
Despite having advantages over other more polluting fuel sources, uranium has some downsides. Most notably, nuclear reactor accidents can be devastating. To see the fallout of one such accident, investors need look no further than the 2011 Fukushima disaster in Japan — a major earthquake caused a tsunami that ultimately led to meltdowns at three reactors and to the release of radioactive materials. After that incident, concern about nuclear power increased, with Germany even announcing plans to phase out nuclear power.
However, uranium is by no means out of the picture as a source of energy, especially as energy demand rises. Japan is slowly bringing its reactors back online, and has added further safety mechanisms to reduce the likelihood of future disasters. Overall, more and more reactors are being built worldwide — as of early 2022, there were 440 reactors operating globally and about 55 being constructed.
The aftermath of the 2011 disaster led to a slump for uranium prices; in fact, in 2016 the uranium spot price hit a 12 year low of US$18.75 per pound, an unexpected turn of events for the sector. Fortunately, prices have risen in the years since. In May 2020, prices hit what was then a four year high of US$34.20, and by September 2021, uranium was at a nine year high of US$50.80. As of early 2022, prices were still trading at around US$46.
While it's impossible to know if uranium will again approach its all-time high point of close to US$140, investors who believe in the future of nuclear energy may want to consider investing in the energy metal. For more information on how to invest in uranium, click here.
This is an updated version of an article first published by the Investing News Network in 2020.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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