The Energy Stocks That Won The Election

This election is, depending on whether you are a political junkie or a normal, sane human being, either the gift that keeps on giving or remarkably similar to the virus that has accompanied it: an annoying, stress-inducing thing that just refuses to go away. Either way, here we are on Friday morning, two and a half days after the polls closed, and the TV pundits are still trying desperately to appear excited about repeating the same comments for the umpteenth time.

From a trading perspective though, the most remarkable thing about it is how little effect it has had at this point. Those predicting a complete market collapse at any hint of a chaotic contested result were wrong, as it seems were those predicting the same should a Biden win look the most likely outcome. Stocks have spent the week climbing back towards record highs, and even oil, which the Trump campaign has told us Biden hates so much, looks like it will end the week higher…

It should really come as no surprise to anybody that the market reality doesn't match the campaign hyperbole, it never does, but I am sure there are a lot of people who, even though they are aware of that, are surprised by crude's strength this week. It has become increasingly obvious that there are only two possible outcomes now, a Biden win or a questionable legal challenge from Trump that would just result in chaos delaying the inevitable and raise the possibility of violent protest.

Given that and the candidates' very different views on energy policy, how can crude make gains?

There are two things at play here. The first is that while Biden's stated policies may not be good for the oil industry over time, there are a few offsetting factors while that plays out. Most obviously, the president-elect, if that is what Joe Biden turns out to be, doesn't take office until January of next year. So why would a futures contract that expires in December go down on the election?

Even if there were a reason it would, the policies that Biden has embraced in the campaign could, as counterintuitive as it seems, actually be bullish for crude in the short term. There are grand 30-year plans to move away from fossil fuels and the like, but the only thing an anti-oil administration can do immediately to make a difference is to increase environmental regulation of the industry. The effects of that will be to squeeze supply, increase barriers of entry, and increase lifting costs for U.S. companies. Those things will impact the price in a bullish way quickly, whereas the bearish implications of a move towards renewables won't have a discernible impact for years, if not decades. Add in the increased chances of a big stimulus bill from a Biden administration and the assertion that a Biden win is bad for crude looks completely erroneous.

Secondly, as this week began, the market had already priced in an anticipated negative reaction to a Biden win. Crude had shed around twenty percent over the preceding two weeks. There were undoubtedly other factors that influenced that, such as Russia casting doubt on their maintaining output cuts, but the offsetting bullish news such as the approach of a big, disruptive storm in the Gulf, was ignored. That indicates an underlying bearishness during that time that is best explained by the anticipated election result.

Given all that, a sell the rumor, buy the fact pattern this week is not at all surprising and I am trading in this almost post-election period with two main themes.

The first is to expect a similar but opposite buy the rumor, sell the fact reaction in another industry where stocks have been moving as the election approached. The conventional wisdom was also that a Biden win would be incredibly good for alternative energy, so solar and wind stocks have soared over the last month or two. However, the issue of timing applies here too, and it just looks like stocks such as FSLR and CSIQ and ETFs such as FAN have gone too far. I will be positioning for a pullback.

On the oil side, if I am right and a Biden administration increases costs for U.S. producers and restricts production enough to keep upward pressure on crude, there are some obvious winners in that scenario to consider. Foreign oil companies with limited U.S. output will have a relative pricing advantage in a market where stimulus could still increase American demand significantly and push prices higher. That would make them winners on both an absolute and relative basis, so I will be looking there for opportunities.

The last few months have been dominated by sustained political campaigning and it has been easy to buy into all the hype and expect a negative reaction in oil and the broader stock market should a Biden win look likely. That, however, hasn't happened and the market never lies, so adopting strategies that reflect the reality rather than the hype is the best thing that energy investors can do from here.