There is a widespread belief that renewable energy sources are replacing traditional hydrocarbon energy sources. That is not the case. Here is the global crude oil demand for the last 20 years.
Consumption has grown from 83.65 million barrels per day (mbpd) in 2005 to a forecast of 105.5 mbpd for 2025. The use of crude oil for energy has increased by 26% over the last two decades.
Much of the production growth was due to the surge in shale oil fracking in the U.S. Over those two decades, U.S. production increased from five mbpd to 13.5 mbpd.
However, two factors affect the current price of a barrel of oil. Let’s count supply and demand as one factor. Oil pricing helps to keep supply and demand in a very well-balanced state. If there is too much supply, the price drops. Too much demand in relation to supply, and the price of oil goes up.
The second factor is the futures traders who set the current price for oil. Traders constantly watch the energy markets to try to predict factors that will affect supply and demand. Traders can quickly move prices. Over the last 52 weeks, WTI crude has ranged from $55.80 to $84.50 per barrel, with plenty of ups and downs along the way.
The volatility in oil prices leads to the same for the profits of upstream energy producers. It is challenging to predict how much they will earn from quarter to quarter, making actual investment in the shares an often frustrating process.
As far as I’m concerned—and this is what I share with my subscribers to Dividend Hunter and my other subscription services—the reason to own upstream energy stocks is as a hedge against bad things happening in the world. Last week, the U.S. dropped a series of massive ordinance penetrator (MOP) bombs, also known as bunker busters, on Iran. Iran controls the Straits of Hormuz, through which flows 20% of the world’s oil supply.
If something happens to cause oil to jump to $150 or $200 per barrel, shares of upstream energy stocks will post huge gains.
Making investing in upstream energy stocks with their volatility a little easier to live with, I only recommend stocks that pay attractive dividends. With quarterly dividends, at least I get paid to wait, as I view these stocks as a hedge against adverse events in the world. Here are a couple of stocks to consider:
- Devon Energy (DVN) has been growing its dividend by 10% per year, and will pay supplemental dividends after especially profitable quarters. DVN yields 3.44%.
- Kimball Royalty Partners (KRP) is a royalty trust that pays variable dividends and has a current yield of more than 12%.
As noted above, I share these thoughts and recommendations on other energy-related high-yield stocks regularly with my newsletter subscribers.
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