• Energy stocks include oil and natural gas stocks as well as clean energy stocks.
• Many energy stocks have quite low market capitalizations.
• The energy sector has multiple strong, positive catalysts.

In 2022, there are two types of energy stocks. On the one hand, there are shares of oil and natural gas companies, and on the other hand, there are clean energy stocks.

Both types of energy stocks have significant, positive drivers that should last for some time. Oil and natural gas stocks are benefiting from high oil and gas prices. Those elevated prices have been caused by a number of factors, including low supplies in the wake of the coronavirus pandemic, sanctions on Russia and pent-up demand for traveling as consumers get less worried about the virus. Also, many oil and natural gas stocks are still relatively cheap even though they’ve rallied a great deal so far this year as oil and gas prices have soared.

Meanwhile, clean energy stocks are being boosted by Europe’s response to the Russia-Ukraine war, the efforts of many governments to increase their countries’ use of clean energy and the rapidly rising popularity of electric vehicles.

What Are Energy Stocks?

By buying the shares of oil and natural gas firms, you are acquiring small percentages of energy companies that deal in some way with oil and/or natural gas. For example, there are companies that look for and sell oil and natural gas, firms that sell equipment used to seek and pump oil and natural gas, and enterprises that transport those fuels. Some large companies carry out most or all of those activities.

When you purchase the shares of clean energy stocks, you’re buying small amounts of companies that deal with one or more means of generating power that emit little or no pollution. Among these power sources are solar energy, wind energy, hydropower, batteries and green hydrogen.

Within the clean energy sector, there are companies that make sell and install solar panels, wind turbines and hydrogen. Firms in the space also manufacture equipment used to develop and enhance the effectiveness of all these forms of clean energy.

Are Energy Stocks a Good Buy?

Due to a variety of factors, oil and gas prices may retreat meaningfully in the coming months. With President Joe Biden due to visit Saudi Arabia in July, the latter country may very well agree to pump significantly more oil. Additionally, multiple major countries in the EU appear to be looking to promote a peace deal between Russia and Ukraine, and even Biden for the first time in many months recently said that the Ukrainians may have to make concessions to the Russians.

Of course, a peace deal between the Russians and Ukrainians would probably push down energy prices. Additionally, as we move towards the middle of summer, investors and traders will start looking towards the end of the summer driving season and the hot weather that tends to push natural gas prices higher.

On the other hand, as I pointed out in the introduction, many oil and gas stocks have quite low valuations. Even if oil and gas prices drop significantly, the market capitalizations of many names in the space will continue to be quite attractive. Similarly, the market capitalizations of many clean energy stocks are very low. As a result many stocks in the energy sector would be attractive additions to investors’ portfolios.

Speaking of clean energy stocks, many of their market capitalizations are very low too, and they should continue to benefit from governments’ efforts to promote renewable energy as a means of fighting climate change.

Many stocks in the energy sector should get a meaningful boost from the increased popularity of electric vehicles. Specifically, due to the need to increase electricity production to power these EVs, renewable energy and natural gas producers are likely to get a big lift, as both renewables and natural gas are frequently used to produce electricity.

Over the longer term, however, the proliferation of EVs is likely to hurt oil stocks. But in the nearer term, the demand for oil is likely to stay strong as the pent-up demand for travel remains strong.

When Do Energy Stocks Go Up?

The share prices of oil and natural gas companies typically rise when oil and gas prices climb. Oil and natural gas prices, in turn, can increase due to various supply and demand trends, as well as because of geopolitical events. Additionally, potential developments on the supply and demand front, along with potential geopolitical events, can cause oil and natural gas prices to advance. Finally, weather trends can raise natural gas prices.

The primary method that American traders and investors use to track the supply and demand trends of oil and gas is tracking U.S. government reports on those fuels. And two of the principle reports used by energy traders and investors are the Weekly Petroleum Status Report and the Weekly Natural Gas Storage Report. Both reports are issued by the U.S. Energy Information Administration. In general, when oil and gas inventories come in below analysts’ average expectations heading into the reports, oil and natural gas prices climb.

Among the types of potential supply and demand trends that can raise oil and gas prices are possible decreased production of the fuels in the future due to possible geopolitical events, potential weather developments, or decisions by companies. For example, oil prices might go up as a result of events like a war in the Middle East or a hurricane in the Gulf of Mexico.

On the other hand, the primary mover of clean energy stocks is actions by governments. For example, clean energy stocks were boosted as a result of a recent decision by the EU to seek to generate 45% of its energy from renewables by 2030, up from its previous target of 40%. But other catalysts — including higher oil and gas prices, decisions to utilize renewable energy by major companies, and new contracts — can lift clean energy stocks.

Energy Stocks and Inflation

For two reasons, oil and gas stocks tend to perform rather well during periods of high inflation. First, during such times, oil and natural gas traders usually push up the commodities’ prices in markets at a faster rate than inflation. And since oil and gas companies’ profits are closely tied to the level of oil and natural gas prices, these energy companies’ financial results tend to greatly improve during periods when the economy is beset with high inflation.

Secondly, unlike luxuries like restaurants and vacations, consumers have little choice but to buy gasoline for their cars and oil for their homes. After all, consumers need electricity, heating, air conditioning and gasoline. However, that situation may change over the long-term due to the spread of electric vehicles and renewable energy.

Clean energy stocks, however, may be less resilient to inflation, because the prices of renewable energy are not set by traders, but by the companies themselves, which may be reluctant to lose market share by raising prices.

Top Energy Stocks

• Enphase Energy (NASDAQ:ENPH): One of the world’s largest makers of microinverters that are used to convert solar energy power into electricity.
• Devon Energy (NYSE:DVN): The company is a major producer of oil and gas in the U.S., with over 5,100 wells and a good price-to-earnings ratio.
• NextEra Energy (NYSE:NEE): NextEra’s subsidiary, NextEra Energy Resources, is “the world’s largest generator of renewable energy from the wind and sun and a world leader in battery storage.”
• Chevron (NYSE:CVX): The company has grown its dividend for each of the last six years and is heavily involved in nearly all phases of the development and transportation of oil and natural gas.
• Exxon (NYSE:XOM): Like Chevron, Exxon benefits from being involved in most parts of the oil and natural gas business.
• APA Corporation (NASDAQ:APA): The company has a relatively even mix between oil and natural gas production and a low price-to-earnings ratio.
• JinkoSolar (NYSE:JKS): One of the world’s largest producers of solar modules, Jinko’s products have set many efficiency records, and the company sells its equipment all over the world.
• Shoals (NASDAQ:SHLS): A maker of solar energy equipment used in Shoals’ top line is expected to grow rapidly.

On the date of publication, Larry Ramer owned shares of JKS and SHLS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.