Last week, we reported that bearish sentiment in the oil market had fallen to levels last seen during the 2008 global financial crisis. According to Standard Chartered commodity analysts, the main themes currently dominating the oil market are expectations for a hard macroeconomic landing, extreme oil demand weakness, and persistent fears of oil market oversupply in 2025. He says it’s a concern.
But a recent Bloomberg analysis revealed an even more surprising finding. While the smart money is long fossil fuels, it is betting big on clean energy. That means the $5 trillion hedge fund industry is net buyers of oil, gas, and coal, but net sellers of batteries, solar power, electric vehicles, and hydrogen. According to Bloomberg, asset managers have concluded that many green investments do not yield returns as quickly or as high as expected.
Hedge fund bets are driving a wave of momentum against renewable energy, with the S&P Global Clean Energy Index losing nearly 60% of its value since its peak in 2021, while the S&P Global Oil Index and the broader The S&P 500 market is falling. The index soared more than 50%.
In the all-important solar power sector, net shorts exceeded net longs for 77% of companies in Q3, compared to just 33% in Q1 2021. Hedge funds are primarily concerned that China’s overwhelming dominance is making it difficult to do business there. Western rivals gain momentum. The largest solar panel manufacturers, consisting of Tongwei, GCL Technology Holdings (OTCPK:GCPEF), Xinte Energy, Longi Green Energy Technology, Trina Solar, JA Solar Technology, and Jinko Solar (NYSE:JKS), are all Chinese companies. To illustrate their advantage, consider that they collectively produce enough panels to generate 5 exajoules of electricity each year. By comparison, the seven largest oil companies include ExxonMobil Corp. (NYSE: ConocoPhillips (NYSE:COP) and Eni Spa (NYSE:E) extract approximately 40 exajoules of oil energy from the ground annually, equivalent to just under 18 million barrels per day. . But when you consider several factors, including the fact that only a quarter of the energy coming out of an oil company’s well is converted into useful electricity, and the majority is lost as heat, Big Solar outperforms Big Oil. Electric motors convert more than 85 percent of electrical energy into mechanical energy, compared to less than 40 percent for gas-fired engines.
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US-listed First Solar Inc. (NASDAQ:FSLR) is the outlier here, with FSLR up 17.2% year-to-date. Unlike many of its peers, First Solar has developed a U.S.-centric value chain and does not rely on crystalline silicon technology, which is dominated by Chinese manufacturers.
The prevailing bearish mood in the sector has some negative implications. Solar companies recorded the highest debt financing in a decade in the first half of 2024, according to a report by Marcom Capital Group. During the period, solar companies raised $12.2 billion in 50 debt financing deals, an increase of 53% from the $8 billion raised in 33 deals in the first half of 2023. Raj Prabhu, CEO of Marcom, said solar companies are facing an increasingly difficult situation. The company is borrowing to finance growth as headwinds in several industries, including high interest rates, renewed tariffs on Chinese imports and the upcoming U.S. presidential election, keep investors back.
“Despite tailwinds from anti-inflation laws and favorable global policies, financing activity in the solar power sector remains subdued,” Raj Prabhu said.
Meanwhile, slowing sales growth has left asset managers cold on the once-strong electric vehicle sector, with 55% of the stocks in the CraneShares Electric Vehicle & Future Mobility Index ETF sold short. In contrast, it was 35% at the beginning of 2021. The proportion of EV battery producers and related suppliers jumped to 57% of the Global X Lithium & Battery Tech ETF’s constituent companies, compared to 29% at the beginning of 2021.
“I’m not saying EVs are dead forever,” said Per Lekander, founder of Clean Energy Transition LLP, a $2.7 billion hedge fund based in London. I’m just saying they’re overinvesting,” he told Bloomberg. Lekander is shorting Tesla Inc. (NASDAQ:TSLA), which has fallen 12.9% since the beginning of the year.
The long-struggling hydrogen sector is still struggling to get off the ground. According to Bloomberg New Energy Finance (BNEF), only 12% of power plants have power plant contracts in place. Even among projects that have offtake agreements, most have vague, non-binding agreements that can be quietly scrapped if a potential buyer backs out. The big problem here is that many industries that could potentially run on hydrogen would require expensive equipment changes to make this a reality, and most companies are unwilling to make that leap. Complicating matters, green hydrogen, which is produced by electrolyzing water using renewable energy, cannot be produced using steam methane reforming to capture the greenhouse gases emitted in the process. It costs almost four times as much as gray hydrogen produced from natural gas or methane. Naturally, hydrogen infrastructure is difficult to build when demand may not materialize for years.
BNEF analyst Martin Tengler said: “No prudent project developer would start producing hydrogen if there were no buyers, and no sensible project developer would start producing hydrogen without a reasonable belief that someone would buy it. No banker would lend money to a project developer.”
“This is no different than any other large-scale energy development. Natural gas pipelines aren’t built without customers,” said Laura Luce, CEO of High Store Energy. Laura’s company has secured an exclusive letter of intent to supply hydrogen to a steel mill that Sweden’s SSAB SA plans to build in Mississippi.
Last month, Shell (NYSE:SHEL) canceled plans to build a low-carbon hydrogen plant on Norway’s west coast, citing a lack of demand.
“We have decided not to proceed with the project because we do not see a market for blue hydrogen materializing,” a Shell spokesperson told Reuters.
Shell’s announcement comes on the heels of a similar move by oil and gas giant Equinor ASA (NYSE:EQNR). Just weeks ago, Norway’s state-run multinational energy company announced that it would not proceed with plans to build a hydrogen pipeline from Norway to Germany with its partner RWE (OTCPK:RWEOY), citing a lack of customers and supply. Announced. Regulatory framework. Equinor was to build a hydrogen plant that would allow Norway to send up to 10 gigawatts of blue hydrogen per year to Germany.
“We have decided to cancel this early-stage project. The hydrogen pipeline has not proven to be viable. This means that hydrogen production plans will also be postponed.”Equinor a spokesperson told Reuters.
Written by Alex Kimani, Oilprice.com
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