Inflation And The Unloved, Under-Owned Fossil Fuel Sector

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For weekend reading, Louis Navellier, while commenting on the fossil fuel stocks, offers the following commentary:

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Unloved Fossil Fuel Stocks

As the world’s technologies and investment capital pour into renewable sources – including solar, wind, biomass, hydropower, and tidal energy – Wall Street and most of the institutional and retail investment communities have lost that loving feeling for fossil fuel stocks. In fact, many investment funds have restricted the purchase of oil and gas stocks as ESG guidelines are added to their funds’ investment by-laws.

While the virtues of renewable energy are well and good, the reality is that fossil fuels supplied 84% of the world’s energy at the end of 2019. On a global basis, renewables made up only 5% of energy usage.

Energy Consumption

By comparison to the global picture, the U.S. is making great strides towards replacing fossil fuel with renewables, where utility-scale electricity generation is seeing the greatest advancements. As of 2020, fossil fuels accounted for 60.3%, nuclear 19.7%, and renewables 19.8%. The U.S. is clearly making faster progress than most of the rest of the world, but despite all the hype and headlines surrounding renewables, 19.8% is a long way from the grid being anywhere near independent from fossil fuels.

There are basically five energy-consuming sectors, in this order of consumption:

  • The industrial sector [32% of all energy consumption, including electricity] includes facilities and equipment used for manufacturing, agriculture, mining, and construction.
  • The transportation sector [29%] includes vehicles that transport people or goods, such as cars, trucks, buses, motorcycles, trains, aircraft, boats, barges, and ships.
  • The residential sector [20%] consists of homes and apartments.
  • The commercial sector [18%] includes offices, malls, stores, schools, hospitals, hotels, warehouses, restaurants, and places of worship and public assembly.
  • The electric power sector consumes the rest [1%], in the form of primary energy to generate most of the electricity consumed by the other four sectors.

Natural Gas Consumption Forecast

While many thought that fossil fuel consumption would decline in proportion to more renewable sources coming online, it might come as a surprise that the U.S. Energy Information Agency (EIA) is forecasting higher consumption of natural gas both this year and next.

Naturtal Gas

Industrial gas consumption is estimated to exceed 23.8 billion cubic feet per day in the second half of 2021, representing record consumption rates, with the forward trajectory in demand looking very bullish for natural gas prices, which are already at multi-year highs, closing last Friday at $5.14 MMBtu.

Naturtal Gas fossil fuel

Rising Oil Prices

Oil prices are also being supported by recovering demand around the world, while inventories are being drawn down. U.S. crude inventories last week fell by 3.5 million barrels to 414 million barrels, the lowest since October 2018. Difficulties by OPEC members struggling to raise output with shortages causing a supply crunch in Europe and Asia added price pressures. WTI crude is about to take out previous highs.

Oil prices fossil fuel

It certainly seems that the politics of pursuing renewable energy at the expense of diminishing fossil fuel inventories is bad policy. Weaning the U.S. and the rest of the world off oil & gas is a noble endeavor, but it should be done in a manner that doesn’t compromise affordable supply. The Biden administration and the progressive wing of the Democratic party are stifling oil & gas production, which is fueling inflation.

Until renewable energy can be a bigger percentage of the grid and fuel needs of the transportation sector, there should be a much more responsible approach to meeting the energy needs of the U.S. and the rest of the world. Pushing oil and gas prices intentionally higher so they are comparable to the cost of renewables isn’t fooling anyone. It’s negatively impacting the middle and lower-middle classes the most.

Based on current demand trends of a recovering global economy heading into holiday travel and winter heating seasons, these elevated oil and gas prices look anything but transitory. It’s a stark reality, not yet fully appreciated by the market, that most fossil fuel energy stocks are trading well off their 2021 highs.

For what it’s worth, the Energy Select Sector SPDR (NYSEARCA:XLE) pays a dividend yield of 4.25%, and its top holding, ExxonMobil Corp. (NYSE:XOM), sports a yield of 6.04%. Exxon also just happens to be the second-largest natural gas producer in the world. For investors seeking inflation-sensitive assets with blue-chip dividend yields trading at pretty sizeable discounts with the underlying commodities showing further upside pricing momentum, consider the oil and gas sector. Over the long-term, renewables will win out, I don’t think anyone refutes this, but sometimes an unloved sector that is responsible for supplying over 80% of the world’s energy needs makes for a powerful intermediate-term investment proposition.

Navellier & Associates owns Exxon Mobil Corp. (XOM) in managed accounts.