Energy is an easy commodity to get completely wrong

And when you get it wrong, you can lose a lot of money. Take this recent Bloomberg headline read: Hedge Funds Pile Up Huge Bets Against Green Future.

Their premise is that funds are long oil and short batteries, solar, electric vehicles (EVs) and hydrogen. But that’s shorting apples and buying oranges. Here’s the fundamental mistake:

Oil is not fuel for electricity.

In the U.S., the world’s largest consumer of oil, less than 1% is used to generate electricity. Globally, coal is the commodity associated with electricity…not oil.

That’s why going long oil and shorting EVs is fundamentally dumb. Yes, EVs are cars. But they don’t need oil.

This is spectacularly stupid investment thesis as outlined by Bloomberg. It could be lost in translation from hedge funds to the reporter. But I think it’s politically motivated…here’s why.

U.S. oil production is surging. We currently produce more oil than ever before, as you can see from this chart from the Energy Information Administration (EIA):

This isn’t a mistake. The U.S. crude oil production is at 13.5 million barrels per day. That’s uncharted territory.

The U.S. produces so much oil that the OPEC nations want to flood the market with oil to lower the price. They started a price war back in 2014 over this same issue. That’s the peak you can see on the chart. It briefly derailed the shale revolution because prices collapsed:

It seems counterintuitive to go long oil when there are rumors of a price war looming. OPEC needs the oil price to be above $100 per barrel for financial reasons. They can’t do that with the U.S. producing so much oil.

Anyone buying crude oil for the long term here is fighting the tide. There is far too much risk of a collapse in price.
On the other side of the trade, hedge funds are shorting the green energy group. This seems like a terrible time to short these stocks. Look at this chart:

This is the First Trust Nasdaq Clean Energy Index fund. It’s just a good example of what the green energy stocks are doing right now. The trend is clear – these stocks are well off their highs. Again, this seems like a high-risk, low reward situation. Here’s why…

A “short” is a bet against the performance of a stock. You sell shares that you don’t own, with the plan to buy them back at a lower price. The hope is that the price falls, so you buy back the shares and keep the difference. However, your gains are capped at 100% if the stock goes bankrupt and you never have to buy it back.

On the other hand, your losses are unlimited, because you have to buy the stock back eventually.

Usually, you short stocks for reasons like:

• Outdated business (think typewriters)
• Scandals 
• Euphoric sentiment 
• Cyclical industries
• Bear Markets
• Overvaluation

However, with green energy, those aren’t appropriate. They are cutting edge businesses. The euphoria is gone. The time in the cycle to short was back in 2021, when they topped. It’s a bull market in electricity and none of these stocks are overvalued.

In other words, shorting green energy has a poor risk to reward ratio right now.

This sort of thing happens when hedge fund managers mix desires with data. Today, the data shows rising demand for electricity. It also shows a potential price war on oil. Investors need to be careful following Wall Street into this trade.

For the Good,

The Mangrove Investor Team

Numbers You Need to Know

21%

In 2023, about 4,178 billion kilowatthours of electricity was generated in the United States. About 60% was from coal, natural gas, petroleum, and other gases. About 19% was from nuclear energy, and about 21% was from renewable energy sources. (U.S. Energy Information Administration)

13.5 Million

US Crude Oil Field Production is at a current level of 13.50M, unchanged from 13.50M last week and up from 13.20M one year ago. (YCharts)

3.4%

Global electricity demand is expected to rise at a faster rate over the next three years, growing by an average of 3.4% annually through 2026. (International Energy Agency)

What’s New in Sustainable Investing

AIC: ESG Investing Trends Diverge in 2024

Michigan wants to invest in more propane storage capacity and is making millions of dollars in grant money available for such business growth. (MLive)

Impact investments worldwide break through US$1.5tn

Pension funds, insurance companies and other institutional investors are now major actors in the global impact investing landscape, reveals the GIIN’s 2024 market sizing research. (Pioneers Post)

Video Of The Week

---