“Please God, give me one more oil boom. I promise not to blow it next time.”

That’s the bumper sticker message I saw a few years back, when I was visiting Austin, Texas to attend a music festival. It made me laugh, but it also conveyed wisdom about this volatile sector.

The energy sector is known for its extreme boom-bust cycles. The S&P 500 energy sector fell 1.33% for the year ending December 2023. By comparison, the broader S&P 500 was up more than 26% for the year. The energy sector’s narrowly negative performance in 2023 stood in sharp contrast to gains of 65.72% in 2022 and 54.64% in 2021.

All of which begs the question: How will the energy sector fare in 2024? Below, I delve into the factors that drove crude oil prices in 2023 and explore the potential path they may take in 2024. I’ll also offer insights for energy investors to position their portfolios.

Crude oil prices are likely to stay elevated in the coming year, boosted by tight supply, worsening geopolitical risk, and accelerating global demand for energy. This confluence of factors will provide the context for profitable opportunities.

The year 2023 was marked by volatility in crude oil prices, driven by a myriad of factors ranging from geopolitical tensions to supply disruptions and demand fluctuations.

At the outset last year, the lingering effects of the COVID-19 pandemic continued to cast a shadow over global oil demand, as sporadic outbreaks and containment measures dampened economic activity in key consuming nations, notably China. The draconian “zero tolerance” COVID policies implemented by Beijing (now lifted) wreaked havoc with supply chains and energy demand.

Simultaneously, throughout 2023 and into this year, tensions in key oil-producing regions such as the Middle East have added further complexity to market dynamics. Escalating conflicts, sabotage attacks by terrorists on infrastructure in the Red Sea, and brinkmanship among the superpowers have heightened concerns over potential disruptions to oil supplies, leading to periodic spikes in crude oil prices.

And yet, as the following chart shows, West Texas Intermediate currently hovers at the same price as 12 months ago:

So far this year, the energy sector is holding its own but trailing the broader market.

The Energy Select Sector SPDR ETF (XLE), Vanguard Energy ETF (VDE), and SPDR S&P Oil & Gas Exploration & Production ETF (XOP) have generated year-to-date returns of 3.21%, 2.86%, and 1.85%, respectively. The SPDR S&P 500 ETF Trust (SPY) year-to-date has gained 6.77% (data as of market close February 22).

The Israel-Hamas war is causing horrific destruction and casualties, destabilizing a region that holds a significant portion of the world’s oil reserves. Logic would dictate that fears of supply disruptions would drive crude oil prices higher. But that’s not happening.

One reason is that, despite the ferocity and bloodiness of the conflict in Gaza, the supply of oil hasn’t been seriously disrupted. Risk has risen, but not enough to prompt preemptive buying. To explain this counter-intuitive dynamic, we must examine the macroeconomic environment.

It’s worth noting that Gaza produces no oil, and Israel’s oil production is negligible. To cause a significant disruption in oil supply, the conflict would need to extend to the enormous oil fields in Saudi Arabia, Iraq, or Iran.

OPEC+ decisions regarding production quotas, coupled with the resilience of U.S. shale producers and the resurgence of investment in conventional oil projects, are greater factors in influencing global supply dynamics.

Economic expansion is on track this year to sustain energy demand. The International Energy Agency (IEA) in January again boosted its 2024 global oil demand growth forecast, predicting that global consumption will rise by 1.24 million barrels per day (bpd) this year. This forecast marked the IEA’s third consecutive upward revision in as many months.

The IEA also expects higher natural gas prices this year. The U.S. benchmark Henry Hub natural gas spot price is expected to average higher in 2024 and 2025 than in 2023, as demand for natural gas grows faster than supply.

But investors should expect volatility to continue in the oil and gas markets. The interplay between supply and demand, exacerbated by geopolitical uncertainties, have contributed to heightened price volatility throughout the past 12 months and this scenario will likely remain in force. OPEC+ is of course a major wild card.

OPEC+ has implemented production cuts that haven’t lifted oil prices as much as initially sought by its members, underscoring the increasing diminution of the cartel’s power. Global oil markets have become increasingly regionalized and OPEC+ members also are known for chronic cheating on quotas.

Ironically, one of the biggest cheaters on OPEC+ production quotas has been Russia itself. The Russian war machine needs vast amounts of revenue to keep fighting in Ukraine.

China, Russia, and Nukes in Space

Snap quiz: Which country will exert the greatest effect on crude oil prices in 2024?

No, it’s not Russia. Nor any other member of OPEC+. The answer is China.

China is the world’s largest importer of oil and second-largest refiner of oil. China also is the global growth engine and the country’s economic woes have weighed on oil prices. When China sneezes, the oil markets catch cold.

Meanwhile, Russian President Vladimir Putin has been rattling his nuclear saber. Reports surfaced this week that Russia might be planning to put nuclear weapons into space, a doomsday scenario that conjures images of James Bond villains.

The intensifying great power competition among the United States, China, and Russia impacts energy markets and oil export patterns.

Environmental and social considerations also are affecting policies and investment decisions in the energy sector. Regulatory measures aimed at reducing greenhouse gas emissions are driving the transition towards renewable energy sources and fostering innovation in clean technologies.

While this transition presents long-term opportunities in energy sectors outside of fossil fuels, it also poses challenges for traditional oil and gas producers, particularly in terms of market demand and investment attractiveness.

The energy sector is at an inflection point, as fossil fuels increasingly give way to renewable energy sources such as wind and solar. Big Oil will never regain the dominance it once enjoyed in the 20th century.

Case in point: In a shake-up of its 30-stock index in 2020, the Dow Jones Industrial Average kicked Exxon Mobil (NYSE: XOM) to the curb and replaced it with software giant Salesforce (NYSE: CRM). John D. Rockefeller is surely spinning in his grave.

Exxon Mobil traces its origins to Standard Oil, the energy conglomerate created by John D. in 1870 that formed the Rockefeller family fortune. Exxon Mobil had belonged to the Dow in some form since 1928, but the energy producer’s tenure as the longest-serving component of the benchmark index reached an ignominious end.

The change reflects the waning economic and financial fortunes of fossil fuels. It also represents a cultural watershed. Exxon Mobil is a “supermajor” oil and gas producer based in the heart of the oil patch in Irving, Texas; cloud giant Salesforce is based in the hipster, latte-sipping tech mecca of San Francisco.

That said, oil and gas will remain vital commodities into the foreseeable future.

Against the backdrop I’ve just provided, the outlook for crude oil prices in 2024 remains positive but rife with uncertainties. Several factors will influence the price trajectory, including the resolution or escalation of conflicts in key oil-producing regions; the pace of global economic recovery, coupled with developments in energy efficiency and alternative technologies; OPEC+ decisions regarding production levels; the growth trajectory of China’s economy; and the resilience of U.S. shale production and investment in conventional oil projects.

Considering these factors, energy investors should adopt a cautious yet adaptive approach to portfolio positioning in 2024.

One energy bright spot for 2024 is the sub-sector of master limited partnerships (MLPs).

MLPs this year are poised to repeat their outperformance relative to the broader energy market, in large part because these high-yielding midstream infrastructure companies are less affected by oil price volatility and geopolitical turmoil.

The upshot: Diversification across energy sectors, including renewables, traditional oil and gas, and energy transition technologies, can help mitigate risks and capture opportunities arising from market volatility and structural shifts.

Editor’s Note: As you position your portfolio for 2024, don’t ignore alternate investments…which brings me to cryptocurrency. Yes, crypto. If you think crypto is too dangerous an investment, think again.

Consider this fact: the “blue chip” of crypto, Bitcoin (BTC), gained 156% in 2023. BTC and the broader crypto realm are on the cusp of a new bull market in 2024.

Every portfolio should have some sort of exposure to crypto. But you need to be informed, to make the right choices. Start receiving our FREE e-letter, Crypto Investing Daily. Click here now!

John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.