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Last year was a mediocre year for traditional energy companies and a disastrous year for renewable energy stocks. But that fate could change by 2024 as the global transition away from fossil fuels continues.
While there are many differences between fossil fuel and renewable energy companies, a common bullish theme for both companies this year is a shift in interest rates, with the Federal Reserve pausing and possibly starting to cut interest rates. This is a change in the environment.
Rising interest rates are weighing on renewable energy companies that need to borrow money for large infrastructure projects such as solar and wind power. Meanwhile, rising interest rates are slowing global economic growth, the main driver of fossil fuel demand.
Robert Johnson, a finance professor at Creighton University and co-author of “Investing with the Fed: Maximizing your portfolio’s performance by following the Fed,” said the central bank will begin a series of rate cuts in 2024. If that happens, energy stocks say that could happen. “That’s fine.”
In the book, Johnson and his co-authors found that from 1966 to 2020, energy stocks returned an annualized 14.3% when federal interest rates were low, and when interest rates were neither rising nor falling. 11.6%, compared to 7.9% when the Fed lowered interest rates. Hiking fee.
We asked experts for their outlook for the energy sector in 2024. Here’s what they have to say about renewable energy, natural gas, and oil.
Michael Cerasoli, portfolio manager of the energy infrastructure strategy at Eagle Global Advisors and portfolio manager of the TrueShares Eagle Global Renewable Energy Income ETF (ticker: RNWZ), believes that this year’s renewable I’m bullish on the energy sector.
FRB effect
“With the U.S. Federal Reserve now indicating that there will be no further increases and potentially decreases in 2024, developers are considering the economics of moving projects into construction. It gives you confidence,” Cerasoli said. “Separately, the ongoing macroeconomic slowdown due to rising interest rates and the subsequent slowdown in development positions supply chains to respond to the strong demand for their products expected as the energy transition progresses. You should be able to do that.”
Rising interest rates, supply chain issues, and an uncertain environment around government support are also holding the industry back, but that is changing, especially with the Inflation Control Act. “The combination of stable/lower interest rates, improved supply chains and clearer tax incentives will set the stage for an impressive recovery in a sector that has been in the doldrums over the past few years,” Cerasoli said.
Rob Summell, senior portfolio manager and managing director at Tortoise, expects the renewable energy industry to continue to grow, primarily due to increased development of onshore solar and wind projects.
Renewable energy stocks in 2024
One utility company that is heavily involved in solar and wind power generation is AES Corp. (AES), which is one of Cerasoli’s top picks within the RNWZ fund.
“AES Corp. is weighed down by concerns about its growth trajectory and ability to decarbonize, but progress on its long-term plan should ease investor concerns,” he said.
PG&E Corp. (PCG), which recently restored its dividend, is another favorite of Cerasoli. “We are seeing significant growth in the rate base due to infrastructure and renewable energy expansion,” he says.
Natural gas is being considered as a bridge fuel as the world gradually moves away from coal-fired power generation while advances in renewable energy sources and grid-scale battery storage occur.
Natural gas as a long-term strategy
In North America, oversupply will keep natural gas prices low in 2024, even as more power companies switch away from coal and natural gas demand steadily increases as manufacturing and industrial activity increases. Tumel expects prices to remain at that level.
Cerasoli is neutral on natural gas in 2024, but is “definitely bullish” on fuels in the long term.
“There is an energy transition happening, but much of the world wants the reliability of the energy that fossil fuels provide, and natural gas is the cleanest option,” Cerasoli said. “U.S. exports of natural gas to the world as a bridge fuel for the energy transition could have the same positive impact on climate change as they have for the United States.”
Natural gas inventory in 2024
There are many natural gas stocks and funds to consider, including Cheniere Energy (LNG), the largest exporter of liquefied natural gas in the United States, and Northwest Natural Holdings (NWN), a distribution company that supplies natural gas. . The company provides gas service to approximately 2.5 million people in Oregon and Washington and has natural gas storage capacity in Oregon.
Although developments in the Middle East have provided some support to crude oil prices recently, crude oil prices have been on a severe downward trend since last year’s high of over $90 per barrel. Concerns about rising production and weak demand are weighing on fossil fuels.
oil supply and demand
Although global economic growth has been weak, Cerasoli said U.S. producers are helping by returning money to investors through stock buybacks and dividends. OPEC and its allies are also helping to limit the price decline, he said.
Demand conditions may change this year due to changes in the interest rate environment.
“Stabilized interest rates and the potential for rate cuts could allow macroeconomic growth to resume, and excess oil production capacity will be quickly used up,” Cerasoli said.
“While we are neutral on oil prices, the traditional energy sector continues to have abundant free cash flow, and even in an environment where oil prices remain flat, there is a possibility that stock valuations will continue to rise due to tailwinds,” he said. I think there is,” he said.
Daniel Bustamante, chief investment officer at asset manager Bustamante Capital, expects oil prices to trade flat for some time in early 2024, at least until inventory drawdowns continue.
“If we can do that, the chances of a sustained rise will be even higher,” he says.
Oil companies have been disciplined enough not to use up all their free cash flow with production expansions, but they have increased production to record highs in 2023, contributing to the recent easing in oil prices.
Impact of global “wildcard” on oil prices
Tummel expects oil supply growth from the U.S. to slow in 2024, while global economic growth will increase oil demand.
“The downward price trend is likely to end in the fourth quarter as oil demand continues to grow at a moderate pace,” said Steve, head of Smith Gambrell & Russell’s environmental law, energy and sustainability practice.・Mr. O’Day says. “As always, oil prices will continue to fluctuate based on other world events.”
This poses a wild card for oil prices in 2024. As we have already reported, if the war between Israel and Hamas spreads to major oil producing countries, oil prices will only rise significantly. Those concerns have been compounded by the killing of a Hamas leader in Lebanon, a stronghold of Iran-backed Hamas ally Hezbollah, and separate attacks by anti-Israel extremists in the Red Sea, backed by Iran, also a major oil producer. It has been increasing recently.
Energy Transition Stocks to Consider in 2024
For exposure to companies involved in oil production as well as natural gas, Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) have deep pockets for large-scale renewable energy investments. Please consider.
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