Here’s some great news for solar investors: Despite the recent market turbulence, oil fundamentals remain tight and prices are finding a solid footing in the face of aggressive short-selling by some speculators. Even if prices on Wall Street nosedive, solar stocks could remain well-supported as a hedge against higher energy costs.
If you believe that history tends to repeat itself, don’t buy stocks in September. Over the last 50 years the DOW has lost about 1.2% during the month, making it the index’s worst performing month. Stocks decline in September because funds that close their books in October sell stocks for tax-loss purposes, or it may merely be because an expectation of declines has become self-reinforcing.
Assuming that stocks do go down in September, should you buy at the end of the month? The outlook for oil prices is one of the key factors to consider if you are a bargain hunter looking for exposure to the solar sector at the end of September. But don’t expect any fireworks when OPEC members meet on September 11.
Like everyone else, the oil cartel is waiting for data to see whether the recent market turmoil will erode energy demand. Data from the CME shows that speculative funds remain long, and OPEC knows that a production increase will give jittery fund managers an excuse to liquidate their positions if we had to see another round of risk aversion.
A recent article in the FT cites Edward Morris, chief energy economist at Lehman, who argues that world oil demand is likely to be affected only marginally, if at all, by the recent market turbulence. He feels that speculative selling by fund managers in need of liquidity was the main reason for lower oil prices during the first half of August. Mr. Morris points out that the real demand for physical oil remains robust, suggesting that oil prices should remain well supported even if we have to go on another stock market roller coaster.
I believe that OPEC is likely to defend oil prices at $60-$65/barrel because of the lower purchasing power resulting from the weakening U.S. dollar. Oil is priced in U.S. dollars, and a lower U.S. dollar reduces the buying power of nations who receive U.S. dollars for their oil exports. Over the past 5 years the U.S. dollar has fallen about 20% against a broad index of currencies and by about 60% against the Euro. Oil barrel purchasing power, when adjusted for inflation and currency movements, is about $45/barrel, far below the current market price of about $74/barrel.
But the weakening U.S. dollar is also insulating some countries from high energy costs, which is why world oil demand is expected to grow by 1.56 million barrels per day in 2008. As long as the U.S. dollar remains weak, oil prices will remain supported by solid physical demand even if prices remained above $70/barrel.
We’re not going to discuss the ongoing conflict with Iran, but it goes without saying that oil prices could spike in the event of any military confrontation with the oil-rich nation.
We will have greater clarity on the oil outlook by the end of September, but my guess is that physical demand will remain robust even if we witness another stock market sell-off, making solar stocks an attractive option for bargain hunters.
Disclaimer: I do not have any exposure to the current market turbulence. I do not own a solar panel.