The bright spots so far this year have been the refiners, as well as SunEdison (NYSE: SUNE), which we added in June 2014:


Our current portfolio Best Buys turned in a decent return over the past year, driven primarily by the refiners and midstream giants Energy Transfer Equity (NYSE: ETE) and Williams (NYSE: WMB):


I also shared my outlook for the key energy commodities. For crude oil, we were warning as early as January 2014 of an oversupply situation, which of course caused the sharp sell-off in the second half of the year. But just as $100/bbl oil wasn’t sustainable, neither was $40/bbl oil. While oil prices will often be driven too high or too low by emotional overreactions, the long-term average should roughly follow the fundamentals of supply and demand. Because demand continues to grow and the cost to produce new supplies is in the range of $60/bbl, prices significantly below that number will ultimately lead to a reduction in supply:


We were correct in 2014 about higher natural gas prices. However, it became apparent this past winter that inventories were returning to normal faster than anticipated. Thus, one of my predictions for 2015 was sharply lower natural gas prices. That has indeed been the case thus far this year. In the short term this is bad news for natural gas producers, but the long-term fundamentals are still positive:


Coal mining, on the the other hand, is an industry in decline. We have consistently warned subscribers away from the coal sector, and although there will be some winners in the mix, you will be swimming against a very strong tide should you choose to invest in coal:


The nuclear power industry suffered a serious setback with the Fukushima disaster in 2011, but people in developing countries want a higher standard of living — which generally comes with a higher level of power consumption. Populous countries like China and India have very limited options for providing cost-effective power for their citizens. They are adding lots of renewable power, but they need large-scale firm power as well.

The options for scaled on-demand power are nuclear, coal, natural gas and, in places, hydropower. Given the limited availability of hydropower and the global push to reduce carbon dioxide emissions, nuclear power is probably the option with fewest drawbacks for densely populated developing countries. That’s why I believe the nuclear power industry will make a comeback over the next decade:


The renewable energy sector will continue to be one with uneven performance. Biofuels in particular will be very sensitive to government policies like renewable fuel targets set by the EPA:

Solar power, on the other hand, has reached parity with conventional energy sources in many markets, and should continue to make gains even if government support falters. In 2007 I predicted that we were entering a period of strong growth for solar power. Solar power capacity has grown by more than an order of magnitude since then:

So where should investors in the energy sector put their money? That depends on your risk tolerance, objectives, and time horizon. But there are opportunities in the sector for just about everyone:


Conclusions

While it has been a rocky year for investors in the energy sector, there have been bright spots such as the refiners and solar power developers. Looking ahead, oil supply and demand will likely tighten up in the second half of the year, potentially lifting the fortunes of the small-cap producers. Conditions in the second half of this year should be considerably better than in the second half of 2014.

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