One issue that hasn’t gotten nearly enough attention in my view is the impact of a pending deadline that will impact the fuel markets. On January 1, 2020, the International Maritime Organization (IMO) will require the sulfur content in marine fuel to drop from a maximum of 3.5% down to 0.5%. The result is likely to be a spike in the price of low-sulfur marine fuels, which will likely impact several types of fuel. Prices for low-sulfur crude oils will likely expand their premium over high-sulfur crudes, and diesel will likely get more expensive compared to gasoline.
As I pointed out in a previous article, the U.S. began to phase in ultra-low-sulfur diesel (ULSD) in 2006. In the decade prior to the implementation of ULSD, retail gasoline traded on average at a $0.04/gallon premium to retail diesel. In 2005, the year before the phase-in of ULSD began, diesel traded at an average of $0.09/gallon over the price of gasoline. And in the decade following implementation, diesel averaged $0.23/gallon over the price of gasoline.
In 2018, retail diesel prices averaged $3.18/gallon, a $0.37/gallon premium over gasoline. I expect that premium to reach $0.75/gallon in 2019, as suppliers scramble to comply with the new guidelines. However, one wildcard may impact this prediction, and that is that the new rules are postponed to allow more time for compliance. I don’t think that’s likely, but it is possible.
5. Solar sector equities recover by at least 20%
There are some significant disconnects in the energy markets as we begin the year. Master limited partnerships, for instance, are trading far out of sync with the underlying fundamentals, and as a result I expect them to outperform in 2019.
But the largest disconnect is in the solar sector. Concerns about the impact of trade wars and tariffs have negatively impacted sentiment in the solar sector. This resulted in a significant decline in solar stocks in 2018. The MAC Global Solar Energy Index Total Return Index (SUNIDX) is a diversified exchange-traded fund (ETF) that is traded on the New York Stock Exchange. The index covers all major solar technologies and includes companies from around the world. In 2018, it saw its value decline by nearly 30%.
Meanwhile, China’s solar panel exports soared by 66% in the 3rd quarter year-over-year, and numerous countries continued to install record levels of solar power. Costs for solar photovoltaics continue to decline, mitigating part of the tariffs that the Trump Administration imposed in 2018.
I expect that investors will again conclude that the future is very much about solar power, and the long-term growth rates there will continue to be phenomenal despite the negative perceptions of 2018. I predict that solar equities — as represented by the SUNIDX — will rise by at least 20% in 2019.
There you have my 2019 energy predictions. The themes are that U.S. oil production will start to slow, that oil prices will begin to recover because of actions taken by OPEC, that gasoline prices will move higher — but not nearly as quickly as diesel prices — and that solar equities will experience robust returns.