Energy Challenges: Rolling Blackouts And Rolling Momentum

Energy Challenges

What a big run we saw today. Is it sustainable? I’d like to show some optimism that the market can get back on track. I’m specifically looking for the S&P 500 to break out of that negative channel I described yesterday. The specific number that I’m targeting on the S&P 500 is 4,450. We came right up against that resistance on Wednesday afternoon. 

With that said, Thursday has been the worst-performing day for the markets in 2022. I can’t explain this anomaly. I simply know it’s true. In addition, we have options expiration for April and head into a long weekend. Finally, today’s rally was a low-volume one. It appears that active traders came in to join the frenzy, but there was a period where the S&P 500’s volume sat at just 0.74. That means the amount of buying and selling was much lower than usual. 

Tomorrow, if there is an official momentum change, I will let you know. But this was a very bullish day, and it could signal that institutions could soon join in a snapback rally after an ugly second week of April. 

Energy Challenges Ahead

I have an article arriving in the national media in a week that I’ll discuss here at length. It’s my bullish argument for Crescent Energy Co. (CRGY), the company that will start buying up energy assets across the U.S. and turning them into cash machines. 

But the heart of the article outlines the ongoing movement to displace oil and gas in the coming decade. First, the ESG movement (Environmental, Social, Governance) has pressed banks, colleges, and pensions to divest from carbon-based energy systems. They’re pushing for anyone in finance to eliminate capital for oil-and-gas companies. As a result, the cost of capital for new energy projects in this arena has increased from 8% in 2012 to well over 20% in 2022. 

I’m all for a transition to alternative energy systems. Still, the EIA plainly states that oil and gas will remain the dominant forms of energy consumption in the United States through 2050. 

Energy Outside of United States

The fact that we are starving the energy industry of capital is essential. We’re in the middle of an energy crisis. Europe has relied on Russia for natural gas, but it has primarily decarbonized its capital. So if you want to produce offshore wind in Europe, you can’t be an oil-and-gas company. 

That’s just insane. It limits the pool of participants (read: engineers), making it less likely that they’ll participate in the transition. Add on that public policies deter oil-and-gas drilling, alongside investor pressure to return cash flow in the form of buybacks, and you have an economy that isn’t ready for the transition. 

As Europe learned before Russia invaded Ukraine, the wind doesn’t always blow, and the sun doesn’t always shine. In addition, the transition to using alternatives (outside of nuclear) is costly for replacing baseload capacity. 

There are challenges due to aging energy infrastructure across Europe for carbon-based systems. But the costs and the timeline for broad deployment of alternative energy infrastructure while the continent is deterring oil-and-gas investment and production are troubling. Colleagues of mine in Europe had anticipated rolling blackouts in Switzerland earlier this year. 

Europe’s energy challenges will remain for the foreseeable future. It’s one reason why JPMorgan Chase’s CEO Jamie Dimon called for a Marshall Plan to help Germany and other nations in Europe address their energy challenges in the future. The question now is: Who will help Australia? 

Another Nation In Peril

According to the Australian Energy Market Operator, the nation could face rolling blackouts in 2025 as it moves forward with a plan to shutter its Eraring power plant. Now, here’s the thing. The region had planned to shutter this plant… but not until 2032. 

The move – seven years up – could create serious problems deploying energy to people. In New South Wales alone, there will likely be a reliability gap of 590 megawatts (MW) in 2025-26. Victoria will see gaps above 300 MW in 2028. Queensland will hit 770 MW in 2030. 

I don’t understand the plan… as it’s incredibly costly to replace this form of infrastructure when the world is experiencing dramatic inflation. In addition, the cost of metals required in alternative energy systems must be mined – largely with costly carbon-based fuels. A transition is a good idea. But a transition without a plan is a disaster. 

It’s a reminder that oil and gas remain sound investments because they fill the gaps in times of emergencies. But unfortunately, coal, natural gas, and oil prices have exploded this year. And there appears to be an even bigger move higher in the months ahead. 

Meanwhile, all of these plans to replace infrastructure with inflated dollars only make the metals in the solar and wind infrastructure much more bullish bets. We’ll talk about one alternative energy company I like tomorrow.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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