On Wednesday, Wunderlich Securities issued a trading call on solar stocks citing a correlation with oil prices. First Solar (FSLR) was the prime beneficiary of this research. Eric Rosenbaum from TheStreet.com beat me to the punch critiquing this call in “Should Solar Stocks Trade on Rising Oil?“, but I will add my two solar panels anyway.
Bottom-line – do not buy solar stocks as a play on higher oil prices. In fact, just buy oil-related stocks to play higher oil prices. Solar’s main contribution to energy generation is electricity. So, solar’s main competitors are the fuels primarily responsible for electricity generation. Coal and natural gas are the twin powers in electricity generation in the United States and across the globe. According to the International Energy Agency (IEA), oil is only 5.5% of all electricity generation. Coal and natural gas combined are 62%.
Oil's contribution to electricity generation has fallen dramatically over the past 35 years
The U.S. Energy Information Administration’s Annual Energy Review 2009 shows oil is a mere 1% of the mix in the United States.
Wunderlich is focused on the recent strong correlation of First Solar to WTI (West Texas Intermediate) oil. However, the real story may be that oil has had an unusually strong, positive correlation to the stock market. Given solar stocks have benefited from a stronger stock market, the correlation between oil and solar is more of a fortuante coincidence. From Rosenbaum’s article:
Pavel Molchanov, analyst
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