Energy is a sector that’s prone to volatility, and 2011 was a fine example. For the spring and summer, the sector was strong, only to plunge during the market swoon in early August, make a recovery in the fall and end up…pretty much right back where it started. The Energy Select Sector SPDR ETF (XLE) wound up finishing the year about 1.35 percent from where it started.
Strait of Hormuz
The biggest story of the year for the energy sector may actually be one of the latest breaking ones. However, the threat by the Iranian government to close down the Strait of Hormuz, the narrow channel leading from the Persian Gulf to the Indian Ocean, if Western powers sanction Iranian oil exports threatens to have consequences that reverberate around the globe. Almost 20 percent of the world’s oil passes through the strait, so a closure would have dramatic consequences. While it remains to be seen whether or not Iran is bluffing or even possesses the capacity to actually close the strait, the threat has certainly gotten the attention of the world.
One of the biggest energy related stories of the year has been the expanded use of hydraulic fracturings, or fracking, to access natural gas and oil reserves in shale that were previously unavailable. While the practice has been around for years, its expanded use has helped provide jobs in an ailing economy and create a solid new source of revenue for oil and gas companies, potentially meaning a 35 percent increase in natural gas reserves in the country. However, fracking has also been a source of great controversy as environmental groups have raised serious questions about its long-term effects. An EPA report earlier this month showed that chemicals used in fracking had seeped into groundwater in Wyoming, prompted further calls for a more in-depth look at the process.
Alpha Natural Resources (ANR) is one of the largest coal mining stocks in the country. Rising to prominence through the acquisition of competitors, Alpha made a fateful decision to purchase Massey Energy for $7.1 billion in 2011, the embattled company deemed responsible for the Upper Big Branch Mine disaster last year. This meant that Alpha had to pay out a $209 million settlement earlier this month to settle claims against the company. While it’s hard to believe that Alpha’s decision to purchase Massey hadn’t included these considerations, Alpha has still gone through a 2011 it would like to forget. The company’s lost nearly 70 percent of its share value since January.
One clear benefactor of the new fracking craze has been Cabot Oil and Gas (COG), which has defied falling natural gas prices by boosting production greatly. Cabot showed steady growth all year long and has more than doubled its share value since January.
Coal stocks took a real beating this year, with several major companies losing ground. Arch Coal Inc (ACI) was one of the snake-bitten coal companies, posing steady loses in share value since January that have culminated with a nearly 60 percent drop on the year.