Date: 12/13/2020
Author: Kent Moors, Ph.D.
As I have observed previously in Classified Intelligence Brief, the terrain is changing quickly in the energy sector. The space today encompasses a multitude of investment options beyond the traditional hydrocarbons, including technology and usage elements that had been regarded as outside earlier ideas of what energy investment means.
Certainly, the new trajectory is hardly going to be in one direction. The market continues to worry about demand levels in the face of a pandemic with the occasional geopolitical hiccup adding to the implied risk.
And the strong advance witnessed over the past month in crude oil and natural gas-related stocks seems to belie the argument that the future of energy is moving into other quarters.
Yet, my staple tenet here is unchanged. It has two overarching components. First, aggregate demand is repressed by coronavirus concerns and the inevitable overreaction to them. These are augmented by “the sky is falling” prognostications by TV talking heads often intent only on creating a herd mentality allowing artificial profits from another short play.
With that demand expected to increase once markets return to a level of equilibrium, and that demand moving quickly to focus on areas other than North America and Western Europe for the next several decades, the picture is wide open.
Remember, that demand for energy of whatever type is what drives all production and consumption in global markets. Put succinctly, what happens in energy predetermines what happens just about everywhere else.
Which leads me to the second component. While the market is experiencing movement to nontraditional sources, it is still the energy balance as a whole driving where capital is directed and from where profits are derived. Worldwide, that balance will continue to include oil, natural gas, and even coal (especially in power thirsty Asia)
As result, our opportunities are coming from much more than drilling rig numbers or futures contract spreads.
Of course, the situation hardly prevents us from making nice moves to profit from severely overbought conventional energy stocks, well-positioned cheap producers, increasing M&A activity, and/or holdings controlling strategically placed midstream assets.
In other words, this is not a zero-sum calculation of either oil or not oil.
But the energy sector is no longer dictated solely by where crude oil or natural gas prices go. As I have discussed many times before, we are moving quickly to a new energy balance model. This one emphasizes a widening number of distinct energy sources providing an ability to transfer demand requirements and increase efficient usage.
That means both alternative and renewable sources are increasingly of interest. Oil will not disappear in the emerging mix and searching for a single source (a “silver bullet,” if you will) to wean society from dependence upon it misses the entire reality.
What will happen is a continuing reliance on oil in some quarters but a corresponding decline in the entire sector being dependent only on oil for its guidance.
Such a restructuring is still in its early stages. Wide areas of the energy sector are still impacted by the rise or fall of oil prices, whether other sources have anything genuinely in common with oil or not.
Much of these results arise more from the way energy is traded than anything else. It will persist so long as those who cut contracts regard other sources as a tradeoff for a dominant energy choice – for example, as coal was regarded until natural gas became a genuine alternative in the generation of electricity or similarly as gas today is viewed contrasted to solar or wind power.
The new energy balance approaching will require a redistribution of investment priorities. As I have observed in the past, solar power is coming on fast. It has achieved grid parity just about everywhere, meaning it is no longer more expensive than other ways of generating electricity… even in the absence of government subsidies. Wind is also following suit.
Likewise, there is a resurgence of nuclear usage worldwide. Traditional reactors remain expensive to build but provide the cheapest way to generate electricity once operational. New advances in modular and localized power reactors are transforming how nuclear is regarded, both on the construction/regulation side and on how these smaller power plants are integrated into a multi-sourced network.
Now it is one thing to be able to provide power at an affordable price. It is quite another to apply that energy in ways providing for a real exchangeability with traditional sources. Electricity is one thing; transportation is quite another.
So long as the market relies on crude oil products to provide the primary transport fuel (either gasoline or diesel) the new balance will remain tilted in favor of oil by default. The use of liquefied natural gas (LNG) and compressed natural gas (CNG) to run entire fleets of high-end trucks throughout Canada, to an increasing extent in the U.S., and in much wider application elsewhere is one move to counter that dependence.
The move of natural gas to passenger vehicles are more restrained in North America but are receiving government support in other countries. The primary impediments remain the cost of engine overhauls and the development of an adequate distribution and retail network.
Electric vehicles (EVs) and biomass additives and substitutes are others. The EV revolution is approaching rapidly and will see 2021 as the pivotal year in a major transition in transportation, especially in China.
There continues to be some range concerns, leading to the ongoing search for a game changing battery technology. Here, recent applications of new battery configurations and oncoming uses of sodium along with other materials to lessen dependence on lithium are both extending the miles between charges and resulting in EVs becoming the preferred choice for driving in densely populated urban locations worldwide. The reduction in pollution alone would be significant.
New charging technologies and a rapid expansion of fast-charging stations have reduced the wait for vehicle repowering. As of the latest reliable report I have read (last month from the International Energy Association), EV today can satisfy over 80 percent of daily driving needs globally. This assumes, on the other hand, that affordable and reliable EVs are available, charging locations are in place, and local regulations are on the books.
The core takeaway: The introduction of EVs will increase the demand for electricity. Yet, that power can be generated in a variety of traditional and alternative ways.
All of this is fast descending on investment markets without even considering the rise in hydrogen fuel cell alternatives.
And the increase in biomass and other biofuel alternatives is also picking up. On this front, limitations in the amount of power realized are a consideration in several topologically challenged locations (well known to those using higher percentages of ethanol in gasoline and the resulting challenge in negotiating inclines).
The new paradigm anticipates a widening number of available sources, each providing a certain portion of the energy need. A combination of traditional gasoline/diesel, electric, natural gas, fuel cell, and biodiesel-run vehicles will be the norm in transport, while an expanding range of electricity generating sources will provide for a better distribution.
There are two keys to the non-oil approach in the new energy investing. One involves technical breakthroughs, while the other is increasing the efficient end usage.
I have been tracking for some time a series of advances that could literally change the playing field overnight in both categories.
On the technical side, two main bottlenecks are preventing solar and wind from price cutting even coal and natural gas.
The first remains better batteries allowing for the storage of generated electricity during times of sunshine or wind and then the ability to use that power at other times. There are some promising breakthroughs emerging having direct application to both commercial and residential use with usage patterns changing quickly. More of these are standalone applications, providing some needed assistance to overtaxed (and older) grid systems.
The challenge here is realized when you consider that each new alternative generating facility still requires a conventional backup plant to fill those times when the sun does not shine or the wind does not blow.
When it comes to the battery needs for electric and hybrid cars, the main challenge is to come up with more compact applications that do not require lithium or expensive rare earth metals. Well, a small company has just patented two approaches that may just be the advance everybody has been waiting for. I have been following this one closely for some time waiting for these guys to go public (so we can trade their stock). There is exciting stuff coming here.
Second, there is the inversion problem. Solar cells and wind turbines harvest direct current (DC) which must be “inverted” to alternating current (AC) for feed to the grid (if the generating system is not a standalone local direct power source). Much of the power produced is lost in this inversion process.
But a new approach on this front is showing significant improvement and has attracted the interest of some heavy hitters in the renewable space.
Either a battery or an inversion breakthrough will provide solar and wind with a pricing advantage. The flow of investment into renewables indicates the market is looking at such improvements quite seriously.
When it comes to end use applications, this is all about smart grids, efficiency networks, and better bridges between peak and off-peak generating prices. Several attractive plays have already emerged in what is becoming a generating-to-use flow space.
The upstream-midstream-downstream sequence so familiar to investors in oil and natural gas is now providing parallel opportunities in electricity. Traditional utilities are transforming and both renewables sources and new technologies are going to be “plugged in” to a more effective (and seamless) network.
All of which is revealing some nice profit opportunities for the energy investor. That means an extremely exciting 2021 investment picture is forming…even before the impact of COVID-19 vaccines is felt.
Dr. Kent Moors
This is an installment of Classified Intelligence Brief, your guide to what’s really happening behind the headlines… and how to profit from it.
Dr. Kent Moors served the United States for 30 years as one of the most highly decorated intelligence operatives alive today (including THREE Presidential commendations). After moving through the inner circles of royalty, oligarchs, billionaires, and the uber-rich, he discovered some of the most important secrets regarding finance, geo-politics, and business. As a result, he built one of the most impressive rolodexes in the world. His insights and network of contacts took him from a Vietnam veteran to becoming one of the globe’s most sought after consultants, with clients including six of the largest energy companies and the United States government.
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