Oct 20, 2021 (WallStreetPR via Comtex) -- China issued a decree earlier this week to its power companies: start stockpiling coal.
Many investors in the stock market don't understand commodity markets fully, which is understandable. But it represents an important blind spot during a commodity-led bull market. And that's clearly what we have in place right now.
Commodity markets are up, in aggregate, over 50.9% in 2021 according to a recent research piece put out by Bank of America. Meanwhile, global stocks are up less than 13% during the same period.
It should be clear which market is driving the bus right now. But understanding this market environment demands some literacy in commodity trading. And one of the most important dynamics, especially in the energy space, is called "substitution effects".
In this case, we are talking about how coal and natural gas are used for a number of functions that oil can also be used for, and thus, that a shortage in coal and natural gas can drive excess demand for oil. Right now, China is preparing for an unpredictable winter, as are many countries. Nat gas and coal prices have been soaring. That has state administrators a bit nervous, especially in governmental situations where, like China, so much has been staked on a one-party system framework.
If people across the Chinese countryside start losing power in the middle of a cold winter a few months from now, it's not only a humanitarian crisis in a country with two billion people. It's a political crisis for the CCP. Hence, the drumbeat to stockpile coal. And that translates to substitution demand for oil and natural gas producers.
Below, we take a look at a handful of key players in the space, as well as one micro-cap with growing exposure, a small float, and a load of shorts on board primed to potentially get squeezed as the energy bull rides onward.
Hess Corp. /zigman2/quotes/203832174/composite HES -1.44% is an exploration and production company that engages in exploration, development, production, transportation, purchase & sale of crude oil, natural gas liquids and natural gas with production operations.
The company operates through its Exploration & Production and Midstream segments. The Exploration and Production segment explores for, develops, produces, purchases and sells crude oil, natural gas liquids and natural gas. The Midstream segment provides fee-based services including crude oil and natural gas gathering, processing of natural gas and the fractionation of natural gas liquids, transportation of crude oil by rail car, terminaling and loading crude oil and natural gas liquids, and the storage and terminaling of propane, primarily in the Bakken shale play of North Dakota.
Hess Corp. /zigman2/quotes/203832174/composite HES -1.44% recently announced that it has received a AAA rating in the MSCI environmental, social and governance (ESG) ratings for 2021 after earning AA ratings from MSCI ESG for 10 consecutive years. The AAA rating designates Hess as a leader in managing industry specific ESG risks relative to peers.
"We are very proud to have received MSCI ESG's highest rating as a leader in our industry," said Alex Sagebien, Vice President, Environment, Health and Safety. "Our AAA rating reflects our strong management practices to reduce carbon emissions as well as our top quartile performance in areas such as biodiversity and land use, reduction of air and water emissions and waste, and making a positive impact on the communities where we operate."
Even in light of this news, HES hasn't really done much of anything over the past week, with shares logging no net movement over that period.
Hess Corp. /zigman2/quotes/203832174/composite HES -1.44% managed to rope in revenues totaling $1.6B in overall sales during the company's most recently reported quarterly financial data — a figure that represents a rate of top line growth of 171.6%, as compared to year-ago data in comparable terms. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($2.4B against $2.5B, respectively).
Viking Energy Group Inc (otcmkts:VKIN) is one of the more interesting small-cap players in the space right now given its growing exposure to both oil and natural gas and its strong support from its majority owner, Camber Energy Inc (nyseamerican:CEI).
VKIN and CEI had been running strong until a big bear fund put out a short report earlier this month. Since that time, short interest has steadily mounted in both stocks, which could provide an opportunity for a fresh short squeeze for speculators. As nineteenth century traders used to say, "he who sells what isn't his'n must buy it back or go to prison".
Viking Energy Group Inc (otcmkts:VKIN) is a prime short squeeze candidate right now given its tiny float of just 7.3 million shares. A tight float is often a big factor in driving squeeze trading - it's basic supply and demand. The float is the supply of shares that are freely traded on the market. The demand is usually about investment interest. But, when shorting activity has been high as a percentage of total trading over a period of time, demand can become desperate as shorts scramble to cut their exposure in a strengthening rally.
One key point that can help to foster this dynamic in VKIN and CEI right now is their stability over the past 10 days or so of trading: as short interest has been mounting in the wake of the bear fund's attack report, these two stocks have been going sideways and even rallying a little even as shorting has picked up.
According to OTCShortReport.com, VKIN has seen an average of over 40% of all trading activity occur from the short side during the past two weeks. That 7.3 million share float could start to feel awfully tight if the stock pushes back above the $1.25 level.