The energy sector has taken a beating since the plunge in crude oil prices. Eventually all markets bottom out and there are profits to be made on the rebound. The question is how to invest in the energy sector in preparation for an eventual recovery. According to Investopedia the energy sector is a stock category that relates to producing or supplying energy.
This sector includes companies involved in the exploration and development of oil or gas reserves, oil and gas drilling, or integrated power firms.
Performance in the sector is largely driven by the supply and demand for worldwide energy. Energy producers will do very well during times of high oil and gas prices, but will earn less when the value of energy drops. Furthermore, this sector is sensitive to political events, which historically have driven changes in the price of oil.
A broader definition of companies providing energy is the energy industry. Although the prices of stocks in this larger definition are affected by the price of crude oil these are not all oil-related stocks. Here is a wider breakdown of the energy sector.
Petroleum Industry: Oil companies, petroleum refiners, fuel storage and transport services, gas stations, oil exploration companies, companies that supply technical equipment such as for inspecting deep water drilling platforms
Gas Industry: Companies involved in natural gas exploration, drilling and extraction, coal gas manufacture, storage, transport and sales
Coal Industry: Coal mining companies, transport (railroads)
Nuclear Power Industry: Companies that design, build and maintain nuclear power plants, uranium mining operations, spent fuel storage facilities
Renewable Energy Industry: This category includes the building and maintenance of hydroelectric dams, wind and solar power facilities, biodiesel and corn alcohol operations, energy extraction from biomass such as vegetable or animal waste
Research: Government funded or assisted projects such as attempts to develop nuclear fusion as a practical energy source
How to invest in the energy sector will depend on where the market is in terms of the price of crude oil and the efficiency of other sources of energy in comparison. The production of so-called gasohol from corn is a case in point.
The Rise and Fall of Gasohol
How to invest in the energy sector can be to find an alternative fuel that is competitive with gasoline. Such is the story of gasohol. Gasohol is mixture of one part ethanol (grain alcohol) and nine parts of unleaded gasoline. This product was viewed as a God send in the America corn belt where it was expected to greatly increase the market for corn. When oil prices rose corn-produced alcohol became more competitive and the likes of Bill Gates were investing heavily in alcohol production and gasohol mixing facilities. Many of these turned out to be bad investments when the price of oil plummeted. According to AG Professional corn prices are going down next year even though more corn is going to ethanol production.
Corn used to produce ethanol is projected 50 million bushels higher than in 2015/16 with a reduction in sorghum use for ethanol and higher expected ethanol blending. Exports for 2016/17 are projected 175 million bushels higher than this month’s upwardly revised projection for 2015/16. More competitive prices and reduced supplies and competition from Brazil support gains in U.S. exports for 2016/17 and 2015/16. U.S. corn ending stocks for 2016/17 are projected at 2.2 billion bushels, up 350 million from the 2015/16 projection.
Investing in any part of the energy sector requires that you learn the details. In short, when the price of oil goes up all parts of the energy sector prosper and when oil falls all parts of the energy sector feel the pain.