Get updates delivered to you daily. Free and customizable.
The Motley Fool
Why Energy Stocks Jumped on Tuesday
By Travis Hoium,
Shares of energy stocks rose sharply early on Tuesday as the market continued to cheer the bailout of bank depositors over the weekend. Regional banking stocks have bounced back in early trading today, and it seems like the banking world is back to some level of normal.
For energy companies, the big impact over the past week has been a sharp reduction in interest rates and changes in how quickly investors think the Federal Reserve can raise rates. Three of the biggest stocks reacting today are Enphase Energy (NASDAQ: ENPH) , which popped as much as 4.7%; Plug Power (NASDAQ: PLUG) , which was up 4.8%; and Kinder Morgan (NYSE: KMI) , up 2.3% at one point. At 11 a.m. ET on Tuesday, the stocks were up 3%, 0.3%, and 2%, respectively.
Some of the moves were driven by investors generally being more bullish on stocks today. But the more meaningful impact is coming from interest rates.
U.S. 10-year government bond rates are up 7 basis points today , but have fallen 11 basis points in the past month and plummeted yesterday. On top of that, investors think it's much less likely the Federal Reserve will raise interest rates next week. That has a number of effects on energy companies.
For Kinder Morgan, higher rates will eventually lead to higher interest costs. You can see below that interest expense has been falling since 2016, partly because of falling debt levels but also because interest rates were dropping.
For renewable energy companies like Enphase and Plug Power, the benefit will come more on the demand side. Solar and hydrogen projects are often financed with debt, so a lower cost of capital is going to help demand.
These moves might not be directly related to the recent banking crisis, but there's a tangential impact. The government's actions to save banks from an all-out collapse will mean the economy is in better shape than it otherwise would have been. And rates might need to stay low for longer than expected to keep these banks solvent.
Both of these are incremental positives for the energy industry. But there is a word of caution: Inflation data came out hotter than hoped today, and that will put pressure on consumers. One of the first things to get cut in budgets is extra driving and energy expenses, so that's a worry.
Energy prices are also falling today. West Texas Intermediate crude is down 1% to $74.03 a barrel, and natural gas is down 0.7% to $2.59 per million British thermal units. This indicates that traders don't expect a jump in demand after the federal action to aid banks. We might be more back to normal than anything else, so even today's gains could wear off as the week goes on.
Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinder Morgan. The Motley Fool recommends Enphase Energy. The Motley Fool has a disclosure policy .