Just like I told you Monday, we finally got that debt ceiling deal that financial media was so scared about back then.
Now that it’s done, of course, headlines are effusively positive across the board, and are being amplified by Pfizer’s FDA request to make COVID-19 vaccines available to 5 to 11 year olds.
Source: Bloomberg
But all this positivity is pushing the headlines that we need to pay attention to further and further below the fold.
The two lower ones I circled in the picture above are solid examples, especially the one touching on the coming winter… and a looming energy crisis that we need to know about.
We all know used car prices have been extremely high for months, but were you aware they weren’t coming down all that much? That’s indicative that supply chains in the automotive sector just aren’t improving, which will lead to more inflation.
Also, were you aware that diesel and heating oil are the exact same product?
And were you aware that we’re at a 20-year low heading into winter?
Source: Bloomberg
That’s bad news for those folks in the northeast who depend on heating oil to keep their homes warm in the winter. If you’re one of those folks, by the way, I’d suggest filling up the tank now.
These kinds of things are why media “tape bomb” culture frustrates me so much. They’re only concerned with attracting eyeballs, and not at all concerned with informing the good everyday American people behind those eyeballs about huge potential risks.
That’s why I called out this week’s free trade on natural gas and coal. These are essential commodities for the winter months…
And we just don’t have enough of ‘em ahead of a looming energy crisis.
Capitalize on an Energy Shortage Nobody Knows About
If you were active in the market Thursday morning, you should have gotten the first leg of yesterday’s free trades at a pretty good price.
Source: Bloomberg
If you bought at the open — remember, just around a 1/10 position, because these will be volatile over the next few weeks — you did fine.
But I should point out that they troughed out around 10:30 a.m. EDT — which is typical for mornings where prices fall — that’s when professionals usually finish up their morning trades and head into meetings or do other work.
When I want to buy something and the price is moving in my favor — down — I usually choose to wait and let it come to me, setting “bear trap” limit orders just above or just below round numbers, such as $18.97 or $19.03 instead of $19.
And from those lows, the United States Natural Gas Fund (NYSEArca: UNG) and Consol Energy Inc. (NYSE: CEIX) have already rallied 3% and 5% respectively, compared to the 1% and 4% gains made by buying at the open.
Now, the reason why those stocks are rallying is pretty fascinating.
It’s also kind of scary, so buckle up.
The Ant vs. the Gas-hopper
I’m sure when you were kids, someone told you Aesop’s famous fable about the ant and the grasshopper.
Basically, the grasshopper plays all summer while the ant works to store up food for the winter.
When winter comes, of course, the grasshopper has to beg for food but is refused by the ants, who only have enough to take care of themselves. Naturally, the grasshopper starves/freezes to death as a result.
At its core, obviously, it’s a parable about how hard work is virtuous and being lazy or indifferent is improvident… and in this case fatal.
Real lighthearted stuff.
But every now and again, life decides to imitate art… often in the dumbest possible way.
The energy sector in particular — a sector in which I’ve been an analyst for more than 15 years — tends to attract a lot of those dumb takes from non-experts.
And one of the most pervasive dumb takes I’ve encountered is the idea that we can just snap our fingers and presto, the power grid is all renewables now.
While I think most of the world would love to get to that point, the truth is that renewable power generation is intermittent.
And unfortunately, the power grid must be balanced by a constant load at all times.
Back in the day, we accomplished this by running what is called “baseload” power — nuclear, diesel and coal — all the time. Then, during peak demand we could bring on dispatchable generation, like natural gas and hydro, to balance the grid.
Since then, coal fell out of favor politically. Instead of replacing the old, retiring plants with baseload power, we replaced them with “cheaper” natural gas, which also happened to be more “environmental” at the time.
The decline in demand of course hit the coal industry hard, and production has fallen over 50% from its 2006 peak.
Source: Bloomberg
Why We’re Trading the Looming Energy Crisis
Wind and solar came into prominence during the Obama administration, however. As costs for those technologies came down, the preference became to build out renewables first due to what we now call environmental, social and governance — or “ESG” — pressures.
Out were the fossil fuels of the past. In were the sexy new “green tech” EGUs with battery storage.
Unfortunately, they built all this while leaving out the battery storage part.
Instead of saving up wind energy in batteries at night to dispatch into the grid during the day, we’re simply just ramping up natural gas in the off hours.
Source: EnergyTransition.org
The problem here is that ESG pressures have also hit the oil and gas industry, which limit the ability of producers to ramp up output.
And moreover, a lot of these “green” technologies are also increasingly reliant on natural gas.
Hydrogen, for instance, which has been bandied about as a replacement fuel for gasoline in vehicles, and a replacement reductant for coal in the steelmaking process, is primarily made by the steam reformation of natural gas.
So right now, we are relying on renewables… backed by natural gas that we’re not producing enough of… which is backed up by coal which we’re really not producing enough of.
If I’ve brought this up once during consulting projects, I’ve brought it up a thousand times. Every time, the muppets have “agreed to disagree” with the analysis, and now we’re here.
Thanks a lot, grasshoppers. Now we’re staring down an energy crisis.
This shortsighted project management is potentially coming to a head this winter, with bituminous coal stockpiles in the East at an all time low…
Source: EIA, Seawolf Research
This is already pulling eastern coal plants offline to save stockpiles for the winter months — ant-style. In turn, this is forcing utilities to buy uneconomic gas instead.
At the same time, gas production in both Texas and the vital Marcellus Shale is beginning to slow…
Source: Bloomberg
While only the Haynesville Shale in Louisiana is providing us any hope for fall injections into storage.
Source: Bloomberg
And although these last two weeks have seen decent injections, they may not get us to the critical level of 3.6 trillion cubic feet by November.
Source: Bloomberg
Worse still, a lack of coal plant backup will likely cause gas plants to run harder this winter, and draw down at a faster pace.
Should we get a severe winter event that shuts down renewables and gas transmission anywhere in the east or Midwest — like we did in Texas back in February — this has the potential to cause rolling blackouts and brownouts throughout those parts of the country.
Why? Because natural gas goes to “guaranteed contracts” — residential houses for heating — before it goes to power plants.
And if that just-in-time supply gets disrupted, there very well may not be enough coal plants to support demand.
In that scenario, both gas prices and coal prices go from the moon into a different frickin’ galaxy…
Source: Bloomberg
Most gas producers have already hedged for 2022 and won’t be able to capitalize, which is why we’re playing the commodity through UNG instead.
But unbeknownst to many, CEIX has an idle longwall mine that could come on and deliver 750,000 tons in the fourth quarter to needy power plants.
That would deliver between $50M and $150M in free cash flow to a stock that absolutely nobody on the Street covers anymore.
And as such, it will catch ‘em all by surprise when they raise guidance this earnings season.
We may get a few more down days as temperatures moderate here in the next few weeks, and as options expiry looms next Friday.
When that happens, be like the ant in the story and stock up a little at a time…
That way, when it’s cold outside, you can burn all the money you made from trading the looming energy crisis to keep you warm.
Buy ‘em on red.
All the best,
Matt Warder
Fortune Research
