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The world has bought upon itself a self-inflicted energy crisis. In a rush to make the earth green again and control carbon emission, many major governments have accelerated the shift from coal to other renewable energy. They discouraged investment in oil and gas production and infrastructure without preparing reliable alternatives. Many banks and pension funds followed suit and removed their funds from fossil fuel assets.
While governments did increase investment in renewable energy, they missed out on one thing; renewables are intermittent. Any climate change can significantly reduce power generation from renewables.
Is Energy Crisis A Real Deal? How Can One Make Money Out Of It?
Renewables are Intermittent
The U.K. was once self-sufficient with its natural gas reserves. But then it moved to wind energy and significantly reduced investment in natural gas. The 2020-2021 winters froze wind turbines in the North Sea, reducing wind power’s share of the U.K.’s energy supply to just 7% from 25%. A similar incident happened in Texas, where a snowstorm impacted renewable power generation capacity.
The energy demand is growing as winters create the need for heating solutions. The U.K. is now importing natural gas from other countries to meet its energy needs. Europe’s natural gas import prices surged 440%. The rising energy prices forced many factories, which can’t afford high energy bills, to shut down. This is adding to the supply chain issue. The fuel prices have rocketed to such levels that transportation cost has surged, increasing the prices of all other goods. Hence, it comes as no shock that Canada (4.7%), the U.S. (6.2%), and the U.K. (4.2%) are witnessing high inflation due to energy prices.
On the one hand, fossil fuel is impacting the future, while on the other hand, rising energy price is increasing inflation, paralyzing industrial activity, and slowing economic recovery. It is important to maintain a balance between climate and economic goals, or neither will be achieved.
How Energy Crisis Impacts Energy Stocks
The energy crisis is not something that will go away in a year. It takes several years to build energy infrastructure for oil and gas production and distribution. Energy stocks have been in a long-term downtrend in the last four to five years as investment in oil and gas slowed.
But now, the International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) have warned that oil prices will continue to rise without increased investment in production. OPEC estimates $11.8 trillion investment through 2045 is needed to meet the growing energy demand. Economies cannot sustain high energy prices for long. With technology everywhere, energy demand will only grow.
Seeing how the demand and supply dynamics play out, the current self-induced energy crisis could bring windfall gains to oil and gas companies. But when these gains would be realized is difficult to tell as the rising case of the Omicron variant has raised fears of another lockdown and a steep dip in fuel demand. Hence, energy stocks fell and could continue to fall till this uncertainty around the virus fades.
How to Make Money in an Energy Crisis
After reading through the current state of the energy industry, it is time for some serious investing business. An investor looks for ways to profit from a situation. In this case, banks and other financial institutions have exited markets that offer the best opportunities.
Higher energy prices have increased cash flows and profits for energy companies. Companies are using this cash flow in many ways. For instance, Suncor Energy is using the extra cash to increase dividends and accelerate its share buyback. Cenovus Energy is using it to repay the debt it took to acquire Husky Energy.
The mixture of energy crisis and pandemic could see small cycles of growth and trough, creating a perfect opportunity to make the most of this volatility. Let’s see how.
Oil and Gas Stocks
Oil and gas stocks are heavily influenced by oil prices, which are governed by demand and supply. This year alone, oil and gas stocks have been through three peak cycles after every pandemic wave. To make money in cyclical stocks, you should buy the dip and sell the rally. Now, you may not know when the stock has peaked. In such a scenario, you can sell them as they fall over 5%.
Suncor and Cenovus produce, refine, and distribute oil and petroleum products. Both the stocks saw three peaks, on March 12, June 15, November 25. They moved in tandem, but their growth was different. While Suncor stock surged 34%, 22%, and 50% in the growth cycle, Cenovus stock surged 44%, 36%, and 73%, respectively. The two stocks are headed for another trough, falling 11% and 7.9% from their peak.
If you already own these stocks, book some profit now and later buy the dip. The dip has just begun, and I expect this downtrend to continue till December end when there is clarity around the Omicron variant. The two stocks are skewed towards the Buy momentum (closer to 60) in the Relative Strength Index (RSI). A good time to buy would be when the RSI is below 40. These stocks are likely to rise again when high demand pushes oil prices.
Energy Infrastructure Stocks
While you play the volatility of oil and gas stocks, it is important to secure your portfolio. High dividend yields from energy infrastructure stocks can secure your portfolio. Canada is the largest exporter of oil and gas to the U.S. Enbridge and TC Energy have oil and gas pipelines that connect Canada to the U.S. They enjoy toll money from the volumes transmitted, which they return to shareholders through dividends.
Since the environmentalist created roadblocks in pipeline construction in October, the above two stocks have been in a downturn, falling 11% and 13%, respectively. They are coming closer to Sell momentum near an RSI of 40. This dip has also increased their dividend yield, creating a good buy opportunity. The energy crisis could reinforce investment in energy infrastructure as the U.S. increases natural gas imports, pushing the pipeline stocks up.
Now is a good time to sell oil and gas stocks and invest in energy infrastructure stocks. This way, you can book profits and secure a higher dividend yield.