The Energy Transition Portfolio: April Issue of TerraJoule.us

Slide1Each issue of TerraJoule.us contains: a Main Essay, a Model Portfolio, a Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor.

Readers may purchase each issue individually, through Ganxy.com: Purchase.

Or, readers may also take a 12 month subscription through Gumroad.com: TerraJoule.us Monthly eBook  Annual Subscription.

This month’s issue concentrates on the model portfolio, published and updated once a month in every issue, and which has just completed its first year. This is an all ETF portfolio, and employs an allocation strategy, concentrating in the energy sector. While it’s satisfying to see the portfolio up +11%, in this month’s issue we take a look at the next ten years, and how the portfolio might change were it to run to the year 2025. In other words, what if the model portfolio were to become a longer running, Energy Transition Portfolio? (We also look at two companies within selected ETFs, Quanta Services and Solar City).

One of the biggest surprises of the past five years has been the ability of renewables—especially solar—to successfully exploit the domain of sluggish, meandering global growth. To understand how this can be is to understand the unique conditions particular to our current energy transition: we live in a time of low interest rates, and, high overall prices for energy from all sources. These twin realities have come together and they’ve produced counterintuitive results. Global demand for energy is growing again, but, almost entirely through the powergrid. Moreover, the bulk of economic activity we detect in global GDP is also transitional, in nature. At TerraJoule.us, we advocate a thesis of energy transition as a rather unique phase in capitalist history. With cherished beliefs upended, the question remains: how can investors locate discrete pockets of high growth during this time, and for the next decade? This month, we consider the likelihood that the TerraJoule.us model portfolio combines the correct themes and timelines, as energy transition enters its second decade, and its likely resolution by the year 2025.

TheTerraJoule.us Model Portfolio, which began April 1, 2013, is also anticipating the coming shoulder season in the energy complex. Accordingly, we will make significant changes to the model portfolio this month.

Following the concept of the portfolio’s two, separate timelines, we have now completed our work in the first year to construct the portfolio’s rough outline. Now comes the more typical Springtime seasonality when oil and natural gas prices tend to weaken. Readers are aware of course that natural gas prices have already weakened greatly. That’s not a surprise. TerraJoule.us over the Winter was, and has remained, adamant that those short-lived price spikes were 1. not sustainable, and 2. not the sign of the next repricing cycle. 

That said, notice that the TerraJoule.us model portfolio is now adding the FCG: First Trust ISERevere Natural Gas Index ETF to the list of investible ETFs. We will not take a position in that ETF just yet, and will likely wait until either 1. a major correction in stocks gets underway or 2. we are closer to 2015. But given the view that natural gas, through the globalized LNG market unfolding later this decade, is due to become a major input to global powergrid growth, it’s inevitable the portfolio will need a direct position in natural gas.

“TerraJoule.us eBook – The Energy Transition Portfolio – April 2014″ by Gregor Macdonald – Editor on Ganxy

Energy and GDP: March Issue of TerraJoule.us

Slide1Each issue of TerraJoule.us contains: a Main Essay, a Model Portfolio, a Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor.

Readers may purchase each issue individually, through Ganxy.com: Purchase.

Or, readers may also take a 12 month subscription through Gumroad.com: TerraJoule.us Monthly eBook  Annual Subscription.

Listen now to this month’s podcast for free, at SoundCloud: Energy and GDP: March 2014.

The theme of this month’s publication, Energy and GDP, is that followers of the energy sector have probably been offered at least once or twice the idea that modern, industrial economies will eventually de-couple from natural resource inputs, and begin to fund growth using a declining quantity of energy. While it’s certainly true that industrial economies can become more efficient (in fact that’s a story that’s been taking place for decades) the dream of de-coupling remains a thesis without evidence. In this month’s issue we take a look at three economies, the US, Japan, and California to probe more deeply into this question:

The reason we are going into some length and detail here is that Japan is the proxy for the expected value that all industrial economies will eventually achieve. That will take time, admittedly, and the rest of populated Asia may not reach its expected value until mid-century. What seems likely is that Japan is on its way to becoming the first post-industrial economy, and is fated to decline in industrial terms, in population, and in wealth from now on. Even the most heroic buildout of solar and wind power, which we very much expect Japan to undertake, will only put a brake on Japan’s long and gentle decline. Yes, there is always some uncertainty in such a forecast: breakthrough technology in nuclear power could occur sometime in the next decade or two. But aside from the above-trend growth we are forecasting globally, from 2015-2020 as energy transition begins to resolve, it is unlikely that Japan will be able to capture much of that cycle. Let us recall that at least 2-4 significant global growth cycles have already passed Japan by, in the last 20 years. Japan is even less likely, now, to “de-couple” from a world of expensive energy and start a new phase of secular growth.

TheTerraJoule.us Model Portfolio, which began April 1, 2013, is also anticipating the coming shoulder season in the energy complex, and is looking to secure a strong first year performance as we head into April and May.

After 11 months, the model portfolio is currently up a little over 11%, and as we head towards the portfolio’s first year mark in April, it does seem likely that the first sales will take place this Spring. The oil and gas complex is set up right here to experience a classic shoulder season. In other words, natural gas and oil prices and especially oil and gas equities have been very strong, right as we are about to roll into Spring. Indeed, natural gas in the past five trading days has given us a preview of what’s likely to unfold as we head towards the month of May. Overall, the performance of the model portfolio has been excellent in the first year, with just about the best mix of exposure to fossil fuels, the powergrid, and renewables.

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“TerraJoule.us eBook – Energy and GDP – March 2014″ by Gregor Macdonald – Editor on Ganxy

When Cities Drive Energy Transition: February Issue of TerraJoule.us

Front Title Page IMAGEEach issue of TerraJoule.us contains: a Main Essay, a Model Portfolio, a Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor.

Readers may purchase each issue individually, through Ganxy.com: Purchase.

Or, readers may also take a 12 month subscription through Gumroad.com: TerraJoule.us Monthly eBook  Annual Subscription.

The theme of this month’s publication, When Cities Drive Energy Transition, is that we’ve reached the point in energy transition when cities are about to take over, as the world economy shifts its weight from liquid fossil fuels to electrical power. This is not the end of oil as a key input to many industrial processes by any means. Indeed, you are encouraged to read the September 2013 issue, Road Map to the Next Repricing of Oil, to understand better why oil will reprice higher. That said, we are indeed passing beyond the oil age, which turns out to have been a brief, 70 year period when oil was the primary energy source for the world:

There were a number of promised changes to developed world oil demand, touted just five years ago, that frankly seemed wishful and unimportant at the time. They included increased MPG in existing cars and trucks, the onset of electric vehicles, the transition to NG powered engines, the resurrection of public transport, growth in renewables, and migration of workers back to the urban core. These factors have banded together now, however, and collectively have shown up five years later as a serious, serious impediment to oil demand growth, especially in the United States. No, sales of Teslas alone have not shifted the trajectory of US oil demand growth. But as the marquis EV, Tesla is a proxy for the amazing set of new conditions now blunting the US economy’s return to oil-based consumerism. As the economy stabilizes, the US populace finds it can take a train on a restored commuter line in Boston; Bus Rapid Transit in Los Angeles; a streetcar in Charlotte; or new bikeways in Indianapolis. Meanwhile, a surge of solar power capacity along with already cheap electricity rates is restoring economic competitiveness to many American cities, as the US economy tilts from consumer-importer to producer exporter. Is it any wonder that California gasoline sales, therefore, have never recovered from the crash?

There are also changes to the TerraJoule.us Model Portfolio, which began April 1, 2013:

Renewable exposure now moves to 15% of the portfolio, as fossil fuel exposure remains stable at 45% and powergrid exposure at 25%. We make further investment in renewable exposure this month.

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“TerraJoule.us eBook – When Cities Drive Energy Transition – February 2014″ by Gregor Macdonald – Editor on Ganxy

Energy and the Economy in 2014: January Issue of TerraJoule.us

Front Title Page IMAGEEach issue of TerraJoule.us contains: a Main Essay, a Model Portfolio, a Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor.

Readers may purchase each issue individually, through Ganxy.com: Purchase.

Or, readers may also take a 12 month subscription through Gumroad.com: TerraJoule.us Monthly eBook – Annual Subscription.

For the month of January only, all annual subscribers will receive a single PDF of every issue published in 2013, for free.

The theme of this month’s publication, Energy and the Economy in 2014, is that oil will finally reprice a second time, a full decade after its first repricing. This process will begin quietly later in the year. We also take a look a the prospects for repricings in coal and natural gas, and the boost to the economy that will start to flow from the extraordinary growth in renewables:

No single fact better illustrates the energy predicament the global economy continues to face, than the strangely immovable price of oil, which has just recorded a third straight year at a stable price just below $100 a barrel. Who would have guessed that a tumultuous, historic energy transition would quiet down, eventually, into a groove of such seeming stability. But is this stability, or constraint? As we peer into the uncertainty of the year ahead, and the pricing changes which lay in store for each of the primary energy sources, from natural gas, to coal, to oil, we must take account of this question. How exactly to describe this constraint? Easy. The global economy remains on a leash, and at best, is able to formulate a kind of sideways-moving advance, in which net, new economic output is mostly offset by a rearranging of the existing pieces of our current system. At TerraJoule.us, however, we endeavor to remain alert, as this temporary equilibrium will surely come to an end. What follows, therefore, is a review and outlook of energy and the economy in the year ahead. In short, 2014 will proceed rather quietly until later this year, when the very big changes coming in 2015 are finally signaled.

There are also changes to the TerraJoule.us Model Portfolio, which began April 1, 2013:

Taken together, pure fossil fuel investments in the model portfolio now amount to 45% of its composition….Powergrid exposure accounts for another 25%. This suggests further investment should direct itself mainly to renewable energy, and in particular solar.

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“TerraJoule.us January 2014″ by Gregor Macdonald – Editor on Ganxy

Invasive Solar: December Issue of TerraJoule.us

TerraJoule Cover IMAGE - DecemberEach issue of TerraJoule.us contains: a Main Essay, a Model Portfolio, a Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor.

Readers may purchase each issue individually, through Ganxy.com: Purchase.

Or, readers may also take a 12 month subscription through Gumroad.com: TerraJoule.us Monthly eBook – Annual Subscription.

Listen now to this month’s podcast for free, at SoundCloud: TerraJoule.us Podcast: December 2013.

The theme of this month’s publication, Invasive Solar, is that during the economy’s slow growth phase, when demand for fossil fuels remains well below trend, renewables and in particular solar are solutions that have come in to exploit a number of legacy shortcomings in the global energy system. In particular, along with natural gas, renewables and solar are becoming disruptive. How so? Well, in the case of solar, it’s growth rate is soaring at a time of broad economic stagnation in the OECD. Even at a time when demand for electricity is flat, to falling. That is quite unusual:

The TerraJoule.us database of solar growth indicates that global capacity this year will have moved from 100 GW to 142 GW. Next year, with China, Japan, and the US leading the way, the world will move to at least 175 GW of capacity. However, we think that the world could add as much as 52 GW of solar next year, with surprising contributions coming from the aggregated growth of smaller markets such as Malaysia, South Korea, and India. By the end of 2014 therefore, the world could see 190 GW of capacity. As a result of conversations this year with solar research analysts based in San Francisco, Boston, and London, we should see several years between 2015 and 2020 when the big three leaders of China, Japan, and the US, will be supported by new growth in many of these smaller markets. Finally, there will also be a return to higher growth rates in Europe.

The December issue also discusses the performance of the Model Portfolio, which is up +4.42% to date. There are also changes to the model portfolio, effective at the close of trading Monday December 2, 2013.

As of November 30, 2013 the TerraJoule.us Model Portfolio is little changed from last month, and is up +4.42% since inception. By comparison, in the same time period, the SP500 is up +15.6% and the ETF which follows Oil and Gas supermajors, IXC, is up 8.32%. As a reminder, the TerraJoule.us model portfolio is a lower-risk vehicle, which has its eye on playing the great transition from liquid fossil fuels to the powergrid. This is both a disruptive and a growth constrained landscape, in which the model portfolio intends to thrive—but importantly—must survive to take part in the global growth phase coming in the second half of this decade.

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“TerraJoule.us December 2013″ by Gregor Macdonald – Editor on Ganxy

China’s Quiet Period: November Issue of TerraJoule.us

TerraJoule Cover IMAGE - NovemberEach issue of TerraJoule.us contains: a Main Essay, a Model Portfolio, a Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor.

Readers may purchase each issue individually, through Ganxy.com: Purchase.

Or, readers may also take a 12 month subscription through Gumroad.com: TerraJoule.us Monthly eBook – Annual Subscription.

This month’s publication, China’s Quiet Period, examines the false framing used over the past decade which attempts to choose between China’s very high rate of growth, and, an outright China crash. As China slows down, however, two important trends are coming to light. First, China is now consuming natural resources at a slower rate, but, from a very high level. Second, China is actually now consuming its own environment and a tipping point approaches in this regard, unless the country takes fairly drastic action.

This is worth repeating: even if China were able to hold fossil fuel consumption at current levels—which most would agree to be a heroic accomplishment without sacrificing growth—the quantity of waterborne and airborne pollution would carry onward at very dangerous levels. In other words, for China, to employ a method other than the slow passage of time to halt the growth of waste production (WP) would require that all new energy demand was satisfied by new deployment of renewables(R). Furthermore, to actually begin the process of CO2 reductions, China would have to deploy waste control (WC) on existing energy consumption. Accordingly, China needs R+WC > WP in order to make progress in absolute terms, for the sake of its environment.

The November issue also discusses the performance of the Model Portfolio, which is up +4.86% to date.

The stock market has taken oil and gas equities to very high levels in the past six months. This demonstrates, once again, that energy equities derive part of their valuation from the underlying commodity but just as important is the overall environment for stock market valuation(s). This is why, in previous issues of TerraJoule.us, it’s been explained that the optimal entry points to build positions in the model portfolio are a function of rhythms in both stock prices, and, commodity prices.

Accordingly we have now reached a moment of very high risk for oil and gas equities as oil and natural gas prices weaken while the overall stock market is at new all time highs (in nominal terms, of course). The price of oil is presently declining in typical, seasonal fashion. So, there is nothing out of the ordinary as we descend from the highs. As pointed out recently at TerraJoule.us, oil tends to make a low in late November or early December. From those levels, it tends to skid along a bottom until February, when it starts a new advance.

However, you will have noticed of late that the momentum-charged solar ETF, TAN, and also the higher beta oil and gas ETF, XOP, have pulled back sharply in the past two weeks. Meanwhile, more stable ETFs like JXI and IXC continue to do well. Surely, this is in part due to the retreat of interest rates on the back of weak economic data, as investment flows return to dividend paying securities. Notably, JXI has now returned over 9% for the model portfolio, and the ETF which covers the plodding and slow oil and gas supermajors, IXC, has returned 11% for the model portfolio.

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“TerraJoule.us eBook – November 2013″ by Gregor Macdonald – Editor on Ganxy

Energy Investment Outlook: October Issue of TerraJoule.us

TerraJoule Cover IMAGE - OctoberEach issue of TerraJoule.us contains: a Main Essay, a Model Portfolio, a Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor.

Readers may purchase each issue individually, through Ganxy.com: Purchase.

Or, readers may also take a 12 month subscription through Gumroad.com: TerraJoule.us Monthly eBook – Annual Subscription.

This month’s publication, Energy Investment Outlook, examines our twenty year energy transition, which appears set to run from 2003-2023. Each phase of this energy transition is associated with a distinct level of global GDP, and this month’s issue forecasts a surprising growth burst that will unfold as the transition to the powergrid finally gains traction. We have now moved into the second half of this transition. Energy Investment Outlook reviews each of the primary energy sources: coal, oil, natural gas, and renewables, and considers their prospects as we move towards decade’s end.

We remain squarely in the third phase of energy transition, patiently (and frustratingly) awaiting the breakout to phase four. In order to make the breakout, OECD populations will have to go back to work, and enjoy normal wage growth. Equally, the Non-OECD will have to return to its higher levels of growth, seen before the crisis began. But higher levels of growth in the developing world is not sufficient, alone, to trigger the fourth phase of energy transition. Such a condition merely leaves the OECD stagnant, and looking to “rent” growth in the Non-OECD, by deploying capital overseas. For the world to grow at the TerraJoule.us projected rate of 4.95%, in the 2018-2023 period, the developed world has to grow organically again. How will this happen?

The October issue also discusses the performance of the Model Portfolio, as the Third Quarter finishes, and we look ahead so a seasonal low in oil prices:

The model portfolio is currently up +1.60%. In particular, it’s encouraging to see GRID (+2.24%) and JXI (+5.44%) doing well, as together they represent the core macro theme of TerraJoule.us: the global transition to the powergrid. Meanwhile, oil and gas ETFs like PXJ and IXC have performed as expected in a volatile period for oil prices, which has seen several spikes to the upside on geo-political newsflow. However, seasonality is about to trump the noise, as oil prices sink back towards $100. We can now expect a more typical, seasonal low in oil prices in late November.

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“TerraJoule.us eBook – October 2013″ by Gregor Macdonald – Editor on Ganxy

Road Map to the Next Repricing of Oil: September Issue of TerraJoule.us

TerraJoule Cover IMAGE - SeptemberEach issue of TerraJoule.us contains: a Main Essay, a Model Portfolio, a Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor.

Readers may purchase each issue individually, through Ganxy.com: Purchase.

Or, readers may also take a 12 month subscription through Gumroad.com: Annual Subscription.

This month’s publication, Road Map to the Next Repricing of Oil,  explains that the next upward price move, starting about two years from now, will share some similarities with the last repricing on the supply side. However, the conditions on the demand side will be very different. Oil will actually be in a subordinate role this time around to growth in the power grid. As energy transition continues, global GDP will be driven, in the years 2015-2020, by coal, natural gas, renewables and the total set of inputs to global power supply. Oil therefore, instead of being a driver for global growth, will be a beneficiary of global growth. Combine this with the inelasticity of oil demand in the Non-OECD, and oil will reprice rather easily during the next global economic expansion:

A number of familiar factors which led to the last repricing are already in play, as we start down the path to the next repricing. The shifting of demand from stagnant OECD economies to growing Non-OECD economies; the recent peaking of spare capacity in OPEC, which comes in the aftermath of OPEC finally increasing production above 32 mbpd; the likelihood that any further supply increases, of note, need oil at $125 or more to give surety to oil companies to invest; the unstoppable rise of oil extraction costs for all oil—not just unconventional oil—which raises the overall margin of safety for development; and finally the price insensitivity which characterizes oil demand in the developing world.

The September issue also includes the next round of changes to the Model Portfolio:

As it stands, the TerraJoule.us Model Portfolio remains in its accumulation phase. We have approximately three more entry points before energy equities, primarily Oil and Gas equities, head into their seasonal low in November/December. It may also be helpful that the recent machinations over a missile strike in Syria will likely cause a nasty hangover in the price of oil, as such geopolitical events reliably cause a mini-spike—followed by a mini-crash. By Q4 of 2013, the price of oil will likely be back below $100 a barrel.

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“TerraJoule.us eBook – September 2013″ by Gregor Macdonald – Editor on Ganxy

Natural Gas: Great Expectations – August Issue of TerraJoule.us

TerraJoule Cover IMAGE - AugustEach issue of TerraJoule.us contains: a Main Essay, a Model Portfolio, a Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor. For a more detailed description of each issue’s contents, please see the Purchase section.

This month’s publication, Natural Gas: Great Expectations,  takes a look at the natural gas resource base, and the coming LNG export boom, to determine whether many of the hopes that now surround this fossil fuel can be fulfilled. Reserve growth in North America is quite robust, and that will only improve as US prices rise from abnormally low levels. While some of the most wild forecasts are not likely to come true–for example, that the world is entering a golden age of gas; or that natural gas is practically unlimited in supply–it’s certainly true that a long cycle for natural gas is getting underway. To this point, China and the US are emerging as the major drivers of demand:

China’s consumption of natural gas is not even 10% of its total consumption of coal. That’s no surprise. After all, China now consumes half the world’s coal. And despite the slowdown in the growth rate of China’s demand, that country is nothing less than a colossus of coal. But what about natural gas? China currently imports about 30% of its natural gas. Half of this comes by pipeline, and the other half come via LNG (liquefied natural gas). But on an absolute basis, China’s use of natural gas remains small. Indeed, in 2012, China imported only 20 billion cubic meters of LNG, about the same as Spain. This is certainly far less than Japan’s LNG imports last year, of 119 million cubic meters. Shall we conclude therefore that China is an unlikely demand driver, for natural gas? On the contrary, for it appears China’s growth of natural gas demand is starting to accelerate.

The August issue also includes the next round of changes to the Model Portfolio:

Demand (for oil) in the OECD continues its decline. But examination of OECD inventories through data provided by IEA Paris shows no new, directional movement of any kind. The recent strength in oil has much more to do with the long overdue convergence of West Texas Intermediate (WTI) and Brent as flows of oil from the interior of the US finally moved more smoothly to the Gulf Coast, where they can be refined for export. This closing of the gap appears to have been amplified by some momentum chasing in the futures market. For now, our exposure to oil supermajors, via IXC, will suffice. Instead, this month’s portfolio changes will continues to focus on the power sector.

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“TerraJoule.us eBook – August 2013″ by Gregor Macdonald – Editor on Ganxy

King Grid: July Issue of TerraJoule.us

TerraJole Cover Image - JulyEach issue of TerraJoule.us contains: a Main Essay, a Model Portfolio, a Data Brief, and a link to a Downloadable Podcast. Gregor Macdonald, Editor. For a more detailed description of each issue’s contents, please see the Purchase section.

This month’s publication, King Grid, examines the emerging relationship between global growth and the power sector. As the global economy struggles through energy transition at lower levels of GDP, the powergrid is advancing.

Can the global powergrid grow at a faster rate than the global economy? Ecological economics generally suggests a steady correlation exists between growth in energy demand, and, growth in economic output. If so, we should expect the economy to be unable to grow faster than energy demand. However, during our present energy transition, when so many users have been kicked off liquid BTU, it may be possible that some of this stranded demand will step forward, and push growth of the powergrid to above trend levels. Surprisingly, this may be possible during a time of sustained, economic weakness in OECD economies.

The July issue also includes the next round of changes to the Model Portfolio:

The stock market correction and bond rout should provide a continuous window in the Summer months to accumulate other ETFs targeted. IXC is starting to look particularly attractive as major components like BP and Shell are off their highs. Meanwhile, given the devastation in utility ETFs, owing to the back up in rates, the global utility ETF, JXI, also looks attractive.

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“TerraJoule.us July 2013″ by Gregor Macdonald – Editor on Ganxy