No other sector has more on the line in this election than energy. How to play it
The energy sector could face disruption if Donald Trump wins a second presidential term eight days from now, with clean energy investors likely to face volatile trading, particularly if the outcome of the election remains unclear well beyond Nov. 5. Trump has built a small lead over Vice President Kamala Harris as the campaign enters the final week, though the race is within the margin of error, according to CNBC’s most recent national poll . The candidates are in a dead heat in the “blue wall” states of Wisconsin, Michigan and Pennsylvania. A Harris victory is expected to largely preserve the status quo of the Inflation Reduction Act, or IRA, which has accelerated the transition to renewable energy resources. A Trump win, on the other hand, could bring disruption, though this will depend on whether the Republican Party also sweeps Congress. The former president is threatening to terminate the IRA, or what he calls the “Socialist Green New Deal,” according to his campaign platform. Solar stocks have broadly sold off in October as the polls have tightened, with shares of First Solar and Enphase down more than 20%. The Invesco Solar ETF (TAN) and the iShares Global Clean Energy ETF (ICLN) have tumbled more than 9% and 10%, respectively. “We expect outsized volatility following the election on the back of investor positioning, especially in the case of a red (Republican) or blue (Democratic) sweep, as markets react to potential shifts in fiscal policy,” Dimple Gosai, an analyst at Bank of America, told clients in a note this month. Trump’s support for fossil fuels is unqualified. He has boiled his energy agenda down to three words: “drill, baby, drill.” While Trump’s platform says he wants to unleash production from all sources, the document specifically calls out oil, gas and nuclear. Nowhere does his platform mention solar or wind power. How voters perceive the two candidates’ energy policies could end up playing an influential role in the outcome of the election altogether. Natural gas is an important industry in Pennsylvania, the crown jewel of the campaign with its 19 Electoral College votes. Whoever wins the Keystone State will likely become the country’s next president. While Harris has abandoned her previous opposition to fracking, it’s unclear if her shift to the center on natural gas will help push her over the finish line in Pennsylvania. Clean energy Executives of publicly traded solar companies are confident that tax benefits will remain in place regardless of who wins in November. This is because the clean energy manufacturing boom has disproportionately benefited Republican congressional districts . While the election will bring short-term volatility, the solar industry remains well-positioned for long-term growth, according to Bank of America. Wind and solar deployments actually grew by 28% under Trump compared with President Barack Obama ‘s second term, indicating that the expansion of renewable energy is increasingly driven by the market, according to Bank of America. The IRA, however, passed without any Republican support and there is a risk of repeal if the GOP sweeps Congress. Trump wants to make the tax cuts passed during his first term permanent. Republicans could seek to repeal the IRA to free up money to finance those tax cuts. Trump has also floated the idea of up to 20% tariffs on all imports and 60% or more on goods from China, which would hurt solar companies that do not have a strong domestic supply chain. In a repeal scenario, residential solar installations would become more expensive and less attractive to consumers, with companies such as Enphase and SolarEdge likely taking a hit, according to Bank of America. The end of benefits for domestically sourced content and higher tariffs would also inflate the cost of utility-scale solar and battery projects, hurting Array , Fluence and NextTracker , according to the bank. First Solar is widely regarded by analysts as the renewable stock that is best positioned to weather the election regardless of the outcome. The solar panel maker has a domestic manufacturing base that would insulate its business from Trump tariffs, according to Bank of America. The company could add customers as Chinese competitors are pushed out of the market, according to the bank. FSLR YTD mountain First Solar shares year to date. A lot will depend, however, whether there is divided government. A Democratic Congress would likely prevent a full repeal of the IRA, according to Bank of America. “A Harris victory or Dem win in the House could alternatively spur a massive relief rally,” Steve Fleishman, an analyst at Wolfe Research, told clients in a note this month. “We recommend investors keep powder dry and be ready to take advantage of potential opportunities.” Fossil fuels Despite Trump’s rhetoric, the election will probably have a marginal impact on the oil and gas industry, according to Roger Read, an analyst at Wells Fargo Securities. Oil and gas production was solid from Obama’s second term through the Trump and Biden administrations, Read said. Though Harris supported banning fracking during her bid for the Democratic nomination in the 2020 presidential primary, the U.S. has produced record amounts of oil and natural gas under the Biden administration. Oil production has remained strong across administrations because of the facts on the ground, according to Read. The shale revolution has unlocked a resource that the industry can exploit at an economic advantage, according to the analyst. A Trump administration could make permitting new production on federal land in New Mexico, the Gulf of Mexico and Alaska easier, benefiting the producers and ultimately pipeline companies, Read said. The vast majority of shale acreage in the U.S., however, is on private land, according to a Morgan Stanley report from August. About 25% of oil and 10% of natural gas production is on federal land and waters, according to the bank. “While it’s easy enough to say that under a Trump administration regulations will be a little easier, both in the permitting side and adding the necessary infrastructure, it’s not in the way we look at it as a game changer,” Read told CNBC. A Trump victory could have an impact on global oil prices through tighter sanctions on Iran. The Biden administration has eased back on oil sanctions enforcement against Tehran, allowing the Islamic Republic’s crude exports to rebound by nearly 1 million barrels per day, according to Morgan Stanley. The resumption of so-called maximum pressure by Trump could take several hundred thousand barrels of Iranian oil off the global market, according to Morgan Stanley. This would benefit the oil majors Exxon and Chevron, whose stocks typically follow the trajectory of crude prices. This post has been syndicated from a third-party source. View the original article here.
