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Will the Energy Boom Push the Dow Higher in 2014?

By Dan Caplinger – Mar 21, 2014 at 6:30AM

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Energy stocks have played a key role in the bull market since 2009, but can they keep up the pace?

The Dow Jones Industrials (^DJI 0.24%) was up nearly 100 points as of 12:30 p.m. EDT Friday, as investors became more confident about the prospects for the U.S. economy. The energy industry has played a big role in driving the pace of domestic economic growth, and this winter's cold weather highlighted some of the opportunities that investing in the sector provides. But given the challenges that Dow components ExxonMobil (XOM 0.12%) and Chevron (CVX 0.80%) face, investors aren't sure whether the boom in U.S. energy production will translate into more gains.

A flash in the pan?
Part of the problem in predicting energy markets is that they can be extremely volatile, especially when confronted by short-term shocks. This winter's weather is the most obvious example, as extreme cold greatly raised demand for natural gas and drove front-month natural-gas futures as high as $6.50 in intraday trading on Feb. 24. Since then, though, prices have fallen by one-third to the $4.25-$4.50 range, sending the gas-tracking U.S. Natural Gas ETF (UNG 1.02%) down more than 13% since late February.

Image credit Flickr/Lindsey G.

Over the longer run, though, crude oil prices have stayed in a tight range for years, with West Texas Intermediate oscillating between $80 and $110 per barrel since late 2010. While those prices are high compared to levels that prevailed throughout much of the 1990s and early 2000s, they're still well below the $150 oil-price peak set in 2008. Commodity prices that haven't provided much in the way of growth has left Exxon, Chevron, and other oil majors scurrying for new production opportunities in order to keep overall revenue from falling.

Winners and losers
Still, the huge levels of activity across the country have definitely improved the prospects for smaller rank-and-file exploration and production companies, as they seek to make the most of established areas of shale production while also pursuing new areas with promise to become the next big energy play. The collateral impact on economic growth, especially in remote areas such as North Dakota, has had a dramatic effect that reaches well beyond the oil patch.

Elsewhere in the energy industry, the rise of natural gas has meant the fall of coal, and coal miners are still feeling the pressure of rock-bottom prices and poor future prospects. With natural gas displacing thermal coal demand, and sluggish steel production hurting metallurgical coal prices, analysts believe coal companies could continue to suffer for years.

Those factors all have implications for the Dow. Caterpillar (CAT 0.92%) provides coal-mining equipment to producers whose capital expenditures rely on healthy financials; weak coal miners mean weak sales of mining equipment, which translates to poorer results from the heavy-equipment manufacturer. Similar ripple effects hit General Electric (GE 0.04%), which has done an exceptional job of expanding its presence in the energy space and has great potential to prosper from a continued energy boom.

Smart investors should keep their eyes on the energy space to see if it continues to drive economic growth both within the U.S. and around the world. With so many companies relying on energy either directly or indirectly, what happens in the sector will help decide whether the Dow rises or falls in the rest of 2014.

Dan Caplinger owns shares of General Electric. The Motley Fool recommends Chevron. The Motley Fool owns shares of General Electric. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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