A Wild and Eventful Year for the Global Energy Markets

At the beginning of 2022, the American benchmark for crude oil prices – West Texas Intermediate – was trading around $80 a barrel. Then the war happened, which sent oil prices soaring past $100 a barrel and had many analysts predicting that $200 a barrel was not only possible, but probable.

But that hasn’t happened. Even as the war continues to disrupt supply and as many countries have moved to ban Russian oil imports, the price of a barrel of oil has fallen by some 30% in two months—putting oil prices right back where they were before the start of the war. Gas prices, which are closely tied to changes in oil prices, have also fallen every day over the last nine weeks, bringing the national average back below $4 a gallon.¹

There are a few takeaways we can garner from this energy rollercoaster. The first is the stark reminder that oil markets are global and fungible. If Russian exports decrease to certain countries, they can increase elsewhere and lost supply can be made up from other sources, like US domestic production (which we have seen so far in 2022 with rig counts moving higher). The second takeaway is that trying to predict the direction of oil prices is fraught with risk – there are too many factors that can alter the supply/demand landscape quickly, like wars, regulations, a slowing or accelerating global economy, new investments, or shifting production quotas from OPEC.

Positioning your investments for a volatile market.

“Don’t put all your eggs in one basket.” It’s a classic proverb, and for good reasons. Diversifying your portfolio is one the most basic pieces of investing advice—but unfortunately, it’s also advice that too many investors ignore.

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And that’s just the oil markets. Taking a broader look at the energy sector in 2022 underscores how much change is taking place, and how drastically the outlook may be shifting. The biggest new driver in 2022 comes from the Inflation Reduction Act, which is essentially a rebranding of many of the energy and climate provisions that were already established in the Build Back Better plan. In play now: hundreds of billions of dollars for renewable energy projects.

For investors “following the money,” there are several key beneficiaries of new spending in the bill. One of the major categories is energy storage, which is central to the promise of transforming the US energy grid. Energy sources like wind and solar are effective but have intermittent problems – i.e., it is not always sunny or windy. To date, there is no highly effective technology for storing solar and/or wind-produced power for later use.

In the Inflation Reduction Act, there is a stand-alone energy storage tax credit for 30% of a company’s investment in the technology, which is likely to usher in several new growth and research in the space. The tax credit can climb up to 50% of the investment if the company manufactures all components domestically and sets up factories and offices in places previously dominated by coal, oil, and natural gas employers. These are very significant credits. In short, the previous tax credit that helped wind and solar become mainstream energy sources is now coming to the energy storage category.

US consumers also potentially get an energy boost from the bill. The package includes several tax credits for homeowners to upgrade their homes with energy-efficient products like heat pumps and new insulation, while also doling out a $7,500 tax credit for purchasing an electric vehicle. There is a cap on the dollar amount of tax credits that can be claimed in a year, so people may consider spreading out home improvements over years to reap all of the benefits.

The bill is not all about benefiting renewable energy, however. Natural gas also scored a win with provisions in the bill to overhaul the permitting process for projects like pipelines. This provision was one of the keys to bringing Senator Joe Manchin on board, as the bill explicitly addresses the Mountain Valley Pipeline projects for natural gas in his home state.

Bottom Line for Investors

The energy market’s topsy-turvy year seems as though it could be a prelude to the secular outlook for the sector. For investors, the bottom line may be the obvious reminder that energy is central to economic growth and development, in whatever form it comes. Fossil fuels still play the biggest role in this energy consumption, but renewables are starting to feel tailwinds from government regulations, tax credits, and in some cases subsidies for scaling up production. The energy mix is likely to continue shifting over time, with new technologies arguably determining the winners and losers. Investors should cast a wide net.

Most investors can get where they need to go over the long term by owning a diversified portfolio of stocks and/or ETFs. In fact, “diversify your portfolio” is one the most basic pieces of investing advice. Sadly, in our experience many investors still put all (or most) of their eggs in one basket.

At Zacks Advantage, we strive to help every investor properly allocate their assets. In fact, we’ve put together a helpful guide to help you understand the basics of portfolio diversification, including:

• 4 myths of a properly diversified portfolio
• Why the average investor’s returns trail almost every other investment category
• How to create a truly well-diversified portfolio

Get our free guide, Is Your Investment Portfolio Actually Well-Diversified?,³ to learn how to create a truly diversified portfolio.

Download our FREE Guide

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¹ Wall Street Journal. August 9, 2022.

² Zacks Investment Management may amend or rescind the Is Your Investment Portfolio Actually Well-Diversified? guide offer for any reason and at Zacks Investment Management’s discretion.

³ Zacks Investment Management may amend or rescind the Is Your Investment Portfolio Actually Well-Diversified? guide offer for any reason and at Zacks Investment Management’s discretion.

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