Commodities Today: Carbon Bubble? We Think Not!

by: Matthew Smith

Today we are going to discuss Al Gore and his latest "big idea" as we know we will get emails and comments over the next few days concerning what was said. We will address that story in our comments below, but want to stress to readers that it is important to read those with opposing views when conducting your research in order to complete due diligence. Most everyone's thesis for various investment calls is based off of assumptions and it is important to delve into the way those assumptions were arrived at. Simply put we disagree with the former Vice President, but we are thankful for his views as it did give U.S. some insight into the bear case.

Stock to Watch:

We want to direct readers' attention to Magnum Hunter Resources (MHR) this morning as their stock is once again approaching $8/share and could see a nice run higher if that resistance is broken. The past week has proven that the $8/share level is a ceiling and we think that if a bounce back in the price of oil occurs that the bullish case here could see bulls move to take out the $8.12/share 52-week high.

Chart of the Day:

Yes there has been a big run lately in shares of Magnum Hunter Resources, however that momentum could help carry the shares back through the $8/share level.

(Click to enlarge)

Source: Yahoo Finance

Commodity prices this morning are as follows:

  • Gold: $1356.50/ounce, up by $11.00/ounce
  • Silver: $23.05/ounce, up by $0.558/ounce
  • Oil: $97.33/barrel, down by $0.87/barrel
  • RBOB Gas: $2.6195/gallon, up by $0.0097/gallon
  • Natural Gas: $3.638/MMbtu, up by $0.009/MMbtu
  • Copper: $3.322/pound, up by $0.044/pound
  • Platinum: $1480.00/ounce, up by $18.10/ounce


We read a very interesting article in The Wall Street Journal (located here) regarding what they dubbed 'The Coming Carbon Bubble'. The story is based off of work done by Al Gore, which is ironic on many levels - the first being that his family's fortune came from oil! Although we disagree with much of what is laid out in the article as the argument against owning carbon assets, we are constantly on the lookout for reasons why our various investment theses may turn out to be incorrect. As readers know we are big energy investors and have been for years, with an allocation that has grown significantly over the past few years for carbon based energy sources.

A few key takeaways from the article are important to understanding the various viewpoints and why one should be bullish or bearish long-term. First this bubble argument is based off of reducing carbon usage by significant amounts by the year 2050, something that could happen in a general sense and should happen on a per capita basis as technology improves. Another key point is that the bubble thesis assumes that investors are incorrect in their assumption that a global base price will be established in order to try to pursued consumers to make the switch. Oil is relatively cheap to produce, really cheap in some parts of the world, and will be used so long as it is cheaper than other forms of energy. Further fossil fuels will be used in areas that are off the grid or have machinery that requires a lot of power, something that electric engines today cannot provide.

Do not get us wrong, there is risk that a technological breakthrough will take place in the next 35 years that could change the way the world uses energy, but that could be said for many industries. The fact that we are viewing many of these shale oil plays as growth opportunities, value plays and momentum plays means that there is little chance that we are still involved in these names that many years from now. The near term risk that a scenario such as the mortgage bubble plays out in the carbon energy market is extraordinarily tiny, and going out 35 years from now it still seems like a low risk.

It is because of our views over the next 5-10 years that we are bullish of oil and natural gas names and not solar names in general. Natural gas is a more logical choice to replace oil, which is part of the reason why we have been such strong bulls on Cheniere Energy (NYSEMKT:LNG) as they would be one of the few with the means to export tomorrow's energy source from North America (arguably the Middle East of natural gas). If we were to skip from oil to electric powered motors then obviously long-term that would hurt names like Cheniere Energy and producers like ExxonMobil (NYSE:XOM) and Chesapeake Energy (NYSE:CHK) but one still has to factor in the fact that the electricity has to come from somewhere and cheap natural gas makes very competitively priced wholesale electricity.

It is our belief that one has to look at their investments on a five year basis with a ten year plan in mind, while making sure that the short-term 12-24 month initial period will have bullish news to provide upside. This keeps one focused on the company's progress while also balancing the long-term objectives with any short-term stumbles and would hopefully prevent one from being caught up in a bubble such as the carbon energy bears believe is coming.

The bears have tried to knock this one down before, but SolarCity continues to find ways to attract financing capital to further their business which has helped push the share price higher. Hard not to like the story here, even if one is an oil bull.

(Click to enlarge)

Source: Yahoo Finance

One final note on solar. We are not bearish the entire sector without thought to why we should be bullish. That stance has worked for us in the past but we have stated numerous times that in the current market, and from the lows, that it is not wise to be short these names as momentum has a tendency to take them far higher than anyone can usually imagine. With that said, we are intrigued with the proposition that SolarCity (NASDAQ:SCTY) is offering consumers with leases on their equipment to allow homeowners and businesses to shrink their carbon footprint as they line up cheap financing to help fuel this mini-plant evolution. This will take a lot of pressure off of the energy grid in the years ahead if it gains traction and should continue to drive down SolarCity's costs as they gain economies of scale. This is one name we certainly would not be short here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.