When you think about fossil fuel investing, most people think about “oil and gas,” but there’s a larger universe. When you think about fossil fuel investing in the equity markets, you think about four major fuel types: coal, crude oil, natural gas, and refined petroleum products. And you can see how they’ve performed differently over time.
Coal is a fossil fuel that is in a solid form and is made up of compressed plant material from millions of years ago. It is the most carbon-intensive energy source and is used mainly as a power source and a steel input. In relation to listed companies, it represents pure-play coal miners and coal-intensive utilities. In relation to investors, coal stocks are extremely sensitive to the following from a market perspective:
While a dramatic pop in coal stocks is achievable over a multi-year period due to tight supply and robust power demand, the underlying issues from a decarbonisation and exclusion perspective mean that multiples still look low.
Crude oil is a liquid fossil fuel derived from the remains of marine organisms trapped in sedimentary rock. It is the backbone of the transport and petrochemical system, so oil prices (Brent, WTI) act as a barometer for global growth expectations. In equities, exposure comes via:
Oil stocks tend to be highly correlated with spot and futures prices, but over longer horizons, they also reflect reserve‑replacement ratios, project breakevens, and capital‑allocation discipline (dividends and buybacks). Historically, energy once commanded a very large share of major indices, but that weight has shrunk materially as other sectors outperformed and climate risk gained prominence. In recent years, oil has shown bursts of outperformance during geopolitical shocks and supply disruptions, but has struggled to consistently beat broad indices over full cycles.
Natural gas is another gaseous fossil fuel with the same origin as the other two. It is usually associated with oil. Natural gas is considered a cleaner fuel than coal and oil. As such, it has been considered a “bridging fuel.” For the investor’s attention:
Natural gas prices are more localised and weather-sensitive than oil prices. They tend to jump around in response to supply outages and cold snaps. This creates opportunities for traders but also creates earnings volatility. In the medium term, stocks with exposure to the gas theme may benefit from the switch from coal and industrial demand. However, they are also vulnerable to the threat of rapidly declining renewable energy.
Refined petroleum products include petrol, diesel, jet fuel, and petrochemicals. Although they are not technically a separate fossil fuel in geological terms, as they are simply a further step in the processing chain for crude oil, their stock exchange trading is differentiated as a separate entity from the pure upstream producers. Key risks include:
In this sector, stock market performance is driven by refining margins, product spreads, utilisation rates, and controls over retail fuel prices. These stocks can sometimes outperform upstream producers when crude prices are volatile and product demand is high.
For market participants in the stock market, ‘fossil fuel investing’ is far from a homogeneous bet, with the drivers, policy, and capital cycle of coal, oil, gas, and refined products varying significantly. A nuanced approach, with a focus on “looking through” the underlying fuel mix, regional policy, and transition risk, is increasingly important, especially as the share of fossil fuels in the benchmark gradually declines while capital flows in favour of alternatives.
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