Recent events in macro energy have been, shall we say, “dynamic”:
- Oil and natural gas prices have been absolutely pummeled. Inflation adjusted, the current bid on natural gas $NG is in the lowest 00.1% of the last 25 years and oil $CL is barely sitting above its 30-yr real price average.
- The growing irrelevancy of OPEC, as evidenced by the most recent meeting.
- Russian, Iranian and Saudi geo-strategy and increasing probability for conflict.
- The commodity supply/demand narrative (another Oil inventory build this morning).
- Near-record short-commodity/long-USD positions.
- COP21 delegates from 195 countries voted for a global climate agreement over the weekend. (Signal vs Noise ratio of this deal can be hotly debated.)
- The US Congress seeks to lift 45 year old US oil export restrictions, but a congressional deal appears to hinge on the renewal of ITC tax credits for wind and solar projects – which may have to do with today’s spike in SUNE to a high of $6.16 (presently trading at ~$5.87.)
- The collapse of credit in high yield and junk.
- Best for last, given today’s big event, the Fed’s impending policy move and it’s impact on the USD.
The aggregate has created an impressive negative feedback loop.
Despite the occasional squeeze, probability suggests conditions are unlikely to mean revert until either something very, very big breaks (war, producer country collapse) or the supply/demand narrative self-corrects over the next 12-24 months via “the cure for low prices is low prices” logic.
There is still much to be considered about what all of this really means at an investment level.
At a macro level, the secular trends for green energy appear to remain intact, and possibly gaining momentum. For what its worth, some analysts now project as much as $70T of renewable projects over the next few decades, with much of that falling to wind and solar.
In the short term, however, falling fossil commodity prices do have an impact on the profitability models of renewable energy projects. A CoC that is rising plus a falling rate per watt is deadly to NPV and DCF calculations.
Conclusion:
- Long term, renewable energy still represents a potentially massive disruption to the fossil based economy of the last 150 years.
- Medium term, fossil-based energy remains highly relevant.
- Short term, aggregate conditions behind the present energy trend have set the stage for a level of volatility that both shorts and longs may struggle to survive.
This post sets the stage for an update on the SUNE complex later this week. (Hint: Twitter followers of @graystoke have the jump.)
Stay tuned.
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