The energy sector is made up of a wide variety of companies. This includes traditional oil majors like Shell (NYSE:SHEL) and Exxon (NYSE: XOM), renewables and alternative energy producers and the miners that support them. This corner of the market tends to be a cyclical one, meaning it rises and falls in cycles. These cycles tend to be tied to the performance of the wider economy. Remember the more activity, the more energy required.
For that reason many traders will keep a close eye on the economy, and indicators of its direction. However, there’s more to it than just keeping an eye on how prosperous—or not—the global market is. In fact, right now the energy sector is smack in the middle of a huge change. Net Zero and climate change have long been talking points for environmentalists and politicians alike. Extreme weather events over the past year have called into question whether we’re doing enough. This could push countries around the world to take more drastic action to reach net zero. This will have a phenomenal impact on the energy sector as we know it. All of this will offer both risks and opportunities for investors.
Finally, geopolitical tension is likely to have a big impact on the energy sector outlook over the next year. The ongoing conflict between Russia and Ukraine will continue to ripple through energy markets. From sanctions limiting the flow of the black stuff to worries about the conflict spilling over and creating instability, this conflict has the potential to shape energy prices. Add to that the worsening conflict in Gaza, and investors shouldn’t count out the impact that tension around the world might have on the sector as a whole.
Net Zero
One of the biggest factors driving the energy sector right now is climate change the push toward net zero. Most major economies now have a net zero commitment, with some pushing to enshrine the measures to get there into law. Progress has been slow at best, but countries, particularly in Europe, are making strides to reform the way we use energy.
Over the next year, traditional fossil fuels aren’t going away. However, now is the time to look for fossil fuel companies that are shoring up their future in a lower-carbon world. Transition plans are essential, or these firms risk being left behind with stranded assets. On the flip side, those working to advance cleaner forms of energy by making them more reliable and affordable, offer an enormous opportunity. In 2024 we’re likely to see massive government investment t in electrification, renewables and hydrogen. These infrastructure improvements should offer investors a world of possibility.
Geopolitical Tension
This year could be make or break in terms of geopolitical tension, and in turn the energy sector. The war in Ukraine has had a direct impact on energy prices, and with tension in Gaza threatening to boil over in to a full-blow middle eastern conflict, the world is in a precarious place. The impact of these worsening issues could be profound in the energy sector.
If things improve, and some resolution is found, we could see energy prices start to drop. However, if they persist, as is expected, there’ll be a floor under prices for some time. What’s more, if they worsen or threaten to spill over in other parts of the world, we could see energy prices rise considerably.
The biggest question mark here is Iran, and how it will respond to the ongoing tension in Gaza. Any direct engagement from the OPEC member could spike oil prices, sending shockwaves through economies around the world.
Economic Downturn
As mentioned above, the energy sector is inherently tied to economic performance. An economy that’s humming along nicely is consuming a fair amount of energy. On the flip side, when people start to pull back on spending, energy-consuming activities like manufacturing slow.
It’s impossible to predict with certainty the direction of travel in the economy next year. But there are some signposts to watch. Inflation has been in focus over the past few years, and it appears to have come under control, although it isn’t coming down as quickly as expected. Central banks around the world began tightening in order to keep a lid on inflation. The consequence of their rate hikes is a slowing economy, which could potentially develop into a recession. Investors concerned about an economic slowdown can keep an eye on job markets for any signs of weakness in advance of a full blown recession.
On the date of publication, Marie Brodbeck did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
