Last year was a mediocre one for traditional energy companies and a dismal one for renewable energy stocks. But those fortunes could change in 2024 as the global transition away from fossil fuels continues.
Although there are plenty of differences between fossil fuel companies and those involved in renewable energy, a common bullish theme for both of them this year is a changing interest rate environment, with the Federal Reserve pausing interest rate hikes and perhaps beginning cuts.
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Rising interest rates have been weighing on renewable energy companies that need to borrow money for big infrastructure projects like solar and wind farms. Meanwhile, rising interest rates have slowed global economic growth, a key driver of fossil fuel demand.
Robert Johnson, a finance professor at Creighton University and coauthor of “Invest with the Fed: Maximizing Portfolio Performance by Following Federal Reserve Policy,” says that if the central bank does embark on a series of rate decreases in 2024, then energy stocks could do “quite well.”
In the book, Johnson and his coauthors found that from 1966 through 2020, energy stocks returned an annualized 14.3% in periods when federal interest rates were falling, 11.6% during times when they were neither rising nor falling, and 7.9% when the Fed was hiking rates.
We asked experts what their outlook is for the energy sector in 2024. Here’s what they had to say about renewable energy, natural gas and oil:
— Renewable energy investments.
— Natural gas investments.
— Oil investments.
Renewable Energy Investments
Michael Cerasoli, portfolio manager of energy infrastructure strategies at Eagle Global Advisors and portfolio manager of the TrueShares Eagle Global Renewable Energy Income ETF (ticker: RNWZ), is bullish on the renewable energy sector this year as the major headwinds from 2023 dissipate.
The Fed Effect
“The U.S. Fed now indicating no more increases, and potentially reductions, in 2024 gives developers confidence in the economics to move projects into the construction phase,” says Cerasoli. “Separately, the ongoing macroeconomic slowdown and subsequent deceleration of development caused by higher interest rates should allow supply chains to make up ground to keep up with what is expected to be strong demand for their products as (the) energy transition progresses.”
In addition to higher interest rates and supply chain issues, a murky environment for government support has also been hampering the industry, but that is changing, especially with the Inflation Reduction Act. “This combination of stabilizing/declining interest rates, supply chain improvement and clarity on tax incentives sets the stage for a remarkable recovery for a sector that took a beating over the last few years,” Cerasoli says.
Rob Thummel, senior portfolio manager and managing director at Tortoise, expects the renewable energy industry to continue to grow primarily from the increased development of onshore solar and wind projects.
Renewable Energy Stocks for 2024
One utility heavily involved in solar and wind electricity generation is AES Corp. (AES), which is one of Cerasoli’s top picks within the RNWZ fund.
“AES Corp. has been weighed down by concerns about its growth trajectory and ability to decarbonize, but progress on their long-term plans will ease investor concerns,” he says.
PG&E Corp. (PCG), which recently reinstated its dividend, is another of Cerasoli’s favorites. “It has meaningful rate base growth sourced from expanding its infrastructure and renewable energy,” he says.
Natural Gas Investments
While renewable energy sources and grid-scale battery storage are making progress, natural gas is considered a bridge fuel as the world slowly weens itself from coal-fired electricity generation.
Natural Gas as a Long-Term Play
In North America, Thummel expects natural gas prices to remain low in 2024 because of a supply glut even as natural gas demand steadily increases with more utilities switching from coal, and manufacturing and industrial activity ramping up.
Cerasoli is neutral on natural gas for 2024 but is “decidedly bullish” on the fuel over the long term.
The “energy transition is happening, though much of the world demands the energy reliability that fossil fuels deliver, and natural gas is the cleanest option,” Cerasoli says. “The export of U.S. natural gas to the world as an energy transition bridge fuel could have the same positive impact on climate change that it has had in the U.S.”
Natural Gas Stocks for 2024
There are plenty of natural gas stocks and funds to consider, including Cheniere Energy Inc. (LNG), which is the biggest U.S. exporter of liquefied natural gas, and Northwest Natural Holding Co. (NWN), which is a distribution company that provides natural gas service to about 2.5 million people in Oregon and Washington and owns natural gas storage capacity in Oregon.
Oil Investments
Although developments in the Middle East have given some recent support to oil prices, they’ve been in a rough downtrend since last year’s high above $90 per barrel. Worries about increased production and slumping demand have been weighing on the fossil fuel.
Oil Supply and Demand
Global economic growth has faltered, but a supportive factor has come from U.S. producers that have been returning money to investors through share buybacks and dividends, notes Cerasoli. OPEC and its allies have also helped keep price declines in check, he says.
The shifting interest rate environment could help change the demand picture this year.
“Interest rate stabilization and the potential for interest rate cuts could restart macroeconomic growth that would quickly eat up spare oil production capacity,” Cerasoli says.
“While we are neutral on oil prices, we believe the traditional energy sector will continue to be awash in free cash flow, a tailwind that has the potential to continue driving equity valuations higher even in a flat oil price environment,” he says.
Daniel Bustamante, chief investment officer of asset manager Bustamante Capital, thinks oil will trade sideways for some time in early 2024, at least until there are sustained inventory draws.
“If we can get that, then there should be higher probability of a sustained rally,” he says.
Bustamante sees buybacks and dividend increases continuing into 2024, as well as potential merger-and-acquisition activity.
Even though oil companies have been disciplined enough to not blow all their free cash flow on expanding production, they did increase their output to a record high in 2023, contributing to the recent easing in oil prices.
Global ‘Wild Card’ Influences on Oil Prices
Thummel sees oil supply growth from the U.S. moderating in 2024, while global economic growth will increase oil demand.
“Because oil demand will continue to grow at a moderate pace, the Q4 trend of declining prices is likely to end,” says Steve O’Day, head of the environmental law, energy and sustainability practices at Smith, Gambrell & Russell. “As always, oil prices will continue to fluctuate based on other world events.”
Which brings us to the wild cards for oil prices in 2024. As we’ve already reported, the Israel-Hamas war will only move oil prices meaningfully higher if the war spreads to big oil producers. Those fears have increased recently with the killing of a Hamas leader in Lebanon, the home of Iran-backed Hamas ally Hezbollah, and separate attacks by anti-Israel militants in the Red Sea who are also backed by Iran, a major oil producer.
Energy Transition Stocks to Consider in 2024
For exposure to companies involved in oil production, as well as natural gas, that have the deep pockets necessary for major renewable energy investment, consider Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX).
More from U.S. News
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Energy Transition 2024: Investing Outlook for the Year Ahead originally appeared on usnews.com
