Energy Sector: Short-Term vs. Long-Term Prospects

The energy sector, thanks mostly to the rising oil prices, saw decent growth in the last few weeks, but it’s already on its way down.

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We are a long way from complete electrification and clean energy. No matter how fast we are progressing, there are several feasibility problems we haven’t solved yet. Take electric cars as an example. As long as the electricity needed to power these vehicles keeps coming from fossil fuels, the carbon footprint issue will persist. And that’s in addition to the ESG “damage” that’s inevitable while obtaining certain raw materials.

And that’s just one facet. We also haven’t solved the energy density problem. Also, the ideal intermediary solution for clean energy (nuclear power) will take a lot of time to gain momentum because relatively few countries are focusing on it, and it takes years (usually five to seven) to properly build a nuclear power plant and generate electricity using it.

The fact that we can’t (yet) harness natural resources like wind and solar the way we need to in order to make them a viable replacement for fossil fuel only adds to the problems we need to solve. The upshot is that the energy sector is likely to stay relevant for a relatively long time, and oil and gas are not going away anytime soon.

The short-term prospects

The WTI crude price has been nowhere near the 2008 levels when it was trading above US$130 per barrel in the last five years. But the current price is nearing its five-time high. And that’s after the demand saw a slump thanks to the new COVID variant. This might indicate that oil demand will surge when economies around the globe fully reopen (without restraints).

Travel demand is likely to rise again, and more planes in the air might become one of the catalysts that push the price per barrel closer to three-digit price territory.

And if the short-term prospects look strong to you, investing in a company like Tourmaline Oil (TSX:TOU) might be a good idea. The stock has grown almost 147% in the last 12 months alone. And that’s not even the strongest growth spurt the company recently went through. If you had bought into the company right after the 2020 crash, you would have seen your capital grow by 463% in less than two years.

It’s an exploration company that focuses on both natural gas and crude oil. The natural gas aspect of the business is likely to stay relevant for a very long time, even if the oil slowly starts to phase out of the market (which might still take decades).

The stock is almost underpriced, despite its recent growth, and is continuously going upward.

Long-term prospects of the energy sector

The long-term prospects are more difficult to gauge because we can’t fully predict how the market will change in the next few years. The world still needs oil and its by-products, but in order to motivate individuals and businesses away from it, governments around the globe might put stricter restrictions on some energy companies and force more cost-intensive ESG measures.

This is expected to cut into the profits of many energy companies, especially heavyweights like Suncor (TSX:SU)(NYSE:SU). As one of the largest energy companies in Canada, and with its future tied to a difficult raw asset like oil sands, the future might be a bit grim for the company.

If the oil demand, however, keeps increasing and no viable alternative is discovered in the next few decades, buying Suncor now might prove fruitful. However, the chances are relatively low.

Foolish takeaway

The oil segment of the energy sector would be the first one the ax will fall on. Natural gas will most likely stay relevant for decades to come, especially for electricity generation. That’s why not all energy holdings are likely to offer similar returns and prospects, so if you are adding this sector long-term to your portfolio, try to stick to the more promising growth assets.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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