The Next Oil Spike Will Be Short-Lived

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Includes: FSLR, PCG, SO, TAN
by: Dana Blankenhorn

Summary

Speculators are betting on $100 oil and may get their wish.

This will be the last hurrah for fossil fuels as renewables achieve real market share.

The best solar stocks may be utilities.

Hedge funds are currently buying oil calls at $100/barrel and more. Speculators are betting that oil prices will not stop at their current price of $50/barrel, but continue rising until U.S. producers can get back into the game.

They might be right. There is no management of oil prices today, as there was in the 1950s with the Texas Railroad Commission or even in the 1970s with OPEC. Oil has become a market of wild price swings that take the rest of the global economy with it.

But the gains will likely be short-lived, and they could be the last desperate gasp of the global oil patch. That's because China and India are choking, not on the price but on burning fossil fuels. China now has nearly double the solar and wind power capacity of the U.S., and the gap is growing. Between them, China, India and Brazil invested nearly as much in renewables as the entire developed world last year, with $286 billion going into the field.

Here is the point the oil bulls still don't understand. When you get a barrel of oil you burn it and you have to get a new barrel. When you buy a solar system that delivers 1 MWatt of power, the demand is taken out of the market for decades.

Despite a continuing glut of coal and natural gas, Bloomberg expects four times more capital - $7.8 trillion - to go into renewable power plants than into coal and gas combined. Renewables will be delivering 70% of Europe's power and 44% of U.S. requirements.

This is the thumb placed down on fossil fuels. It's coming down hard and it's coming down permanently. The oil glut of 2015 was indeed created by fracking and Saudi policy, but the next downturn in oil prices will be caused by competition from renewables, primarily solar and wind. And it will be permanent.

That's no longer just some crank environmentalist talking. That's what market analysts are now starting to say. And my feeling is they're being pessimistic. Some 64% of new power generation in 2016 came from solar power, which should grow 119% for the year.

The 16 GWatts of new power generated from solar still won't make a huge dent in baseload demand, which is a constant 373 GWatts, but utilities are now the biggest investors in the space. They are looking at the bottom line, not the planet's future, and it comes up solar.

The problem for solar investors is that this still does not guarantee them a return. The Guggenheim Solar ETF (NYSEARCA:TAN) remains down 51% on the year. None of the major solar stocks have seen any positive price movement in the last year - industry leader First Solar (NASDAQ:FSLR) is down 4%.

Instead, the big gains in solar are going to the buyers of projects, the utilities. PG&E (NYSE:PCG) stock has delivered a 25% return over the last year, plus a dividend currently yielding 3.1%. Southern Co. (NYSE:SO) is up 21% and yields 4.38%.

If you see a bright solar future, in other words, the utilities have been shown to be the way to bet.

Disclosure: I/we 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.