Soon, Make This Cyclical Bet That Everyone Else Is Afraid To

31 ต.ค. 2020

While the recent pain in fossil fuel companies and overall bullish run in clean energy names seems to have given the impression that oil is finally in its inevitable secular downtrend, I prefer to look at the situation and see a massive cyclical medium term buying opportunity. While its obvious that over time oil and gas companies will *eventually* see their demise as our entire energy infrastructure pivots to renewables, right now we are probably at least a decade away from transitioning even 50% of it. This fear, combined with a potential democratic presidency, combined with a massive demand shock in the form of COVID 19, and traditional energy giants are struggling, trading at record low valuations.

While I believe in the general maxim that the market does a good job at discounting the future, and that lots of oil companies deserve to be trading where they are trading, I also believe that sometimes the market slingshots prices too far in one direction or the other, and our entire job as traders rests on the ability to correctly identify these discrepancies and take advantage of them. Quality energy assets, not distressed ones, will make it through the current hurdles just fine, and will likely see much, much higher prices from here as our grid / transportation infrastructure still absolutely require their presence. In the space I like BP and ENB the most.

Combined with this has been a massive run in the prices of solar and renewable generation capacity, like CSIQ, BEP, and NEE. I view this as run as an identification of Solar's secular trend and upside, but also as a bet on a friendly democratic administration coming to power next week. If Trump wins, this premium instantly gets wiped out. If Biden wins, I view it largely as a 'sell the news' scenario. Either way, I think solar has come too far too fast, and is both 1.) set to retrace some gains and 2.) far away from fully supplanting our national energy infrastructure.

Thus, my cyclical bet. I think that sometime soon, traditional energy names will begin to massively outperform clean energy names as this realization sets in, and on the chart above I'm waiting to see some bullishness in the price action before I dip a toe. If the trend confirms on the monthly chart then I'll be scaling in with full size. Use this idea how you will, but keep it on your radar!!

Cheers!

1 พ.ย. 2020

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