For all the push towards renewable energy, it has actually been traditional fossil fuel stocks that have outperformed so far this year. Those involved in extracting and marketing oil, gas and coal have done very well, thanks to rising core prices. But with the sharp move higher having peaked, should I buy fossil fuel stocks now or have I missed the boat?
Why fossil fuels are back in focus
Unlike other assets such as stocks and bonds, the commodities of oil and gas are actually consumed. This means that there will always be a core demand from users that need the end product to operate. For example, airline operators need jet fuel to fly planes. On the supply side, there’s some scope to increase production, but it isn’t an overnight thing.
Events so far this year have meant that demand has risen, but supply hasn’t, causing prices to skyrocket. Primarily, this relates to the war in Ukraine, with Russia being accused of limiting the piping of oil and gas as a political weapon.
With the reduction in supply, prices in Europe and here in the UK have risen sharply. It has reached such a state that the UK government has had to step in.
The bottom line here is that the elevated prices have meant that producers such as Shell, BP and Glencore have produced large profits so far in 2022. As a result, the share prices of such companies have jumped.
Why I’m cautious on fossil fuel stocks
Despite the excitement around the share prices rising, I’m a little more conservative for several reasons. I think we’re close to peak energy levels.
After all, if the government is actively intervening in the market, it’s a clear sign that things are stretched. With this being the case, I don’t think that fossil fuel stocks will be able to sustain such high profits for the long run.
Further, the spike in oil and gas prices is a further reason why the world is wanting to move towards renewable energy sources. Given the dependency towards a nation like Russia to traditional fuel, many are seeing the need to diversify away from these types of fuels. If anything, I want to invest in renewable energy stocks, not fossil fuel ones.
Not a quick fix
I won’t be jumping on the bandwagon and investing in fossil fuel stocks at the moment. But as a disclaimer, this doesn’t mean that I think these stocks are going to fall in value.
For example, take Glencore. It’s active in the oil and gas market, which is one reason why the share price is up 47% over the past year. Yet the giant is also active in mining a vast variety of metals and minerals. If we see the price of oil and gas return to normal levels in the next year, I don’t think this will hurt the overall business that much as it’s diversified in operations.
My main takeaway is that I think there are better sectors that could offer me higher returns than fossil fuel stocks in the long run.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.