Solar Stocks Fall On Lower Crude Oil Prices, But Selloff Is Overdone

Solar stocks saw a sharp sell-off on Monday, as crude oil prices fell by about 4%, testing 5-year lows. Solar industry bellwethers SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) saw their stocks fall by about 7% and 5%, respectively, in Monday’s trading, while Chinese solar players Trina Solar (NYSE:TSL) and Yingli Green Energy (NYSE:YGE) fell by around 6% each. In this note, we spell out some possible reasons for the decline and why we believe solar stocks may be oversold.

See Our Complete Analysis For Solar Stocks Trina Solar| Yingli Green Energy | SunPower | First Solar

Oil prices have fallen by about 40% since mid-June, amid concerns of sluggish consumption growth, strong supply from North American shale fields and OPEC’s recent decision to maintain its production output. The Guggenheim Solar ETF (NYSEARCA:TAN), a popular exchange traded fund comprising of solar stocks, has fallen by over 20% since mid-June. Solar stocks have historically responded to fluctuations in oil prices despite the fact that crude oil and solar energy are not direct substitutes – crude oil is primarily used to produce transportation fuels, while solar power is used to generate electricity. However, the markets count oil prices as a proxy for the cost of energy in general, and lower prices reduce the urgency to invest in energy sources such as solar.

Solar Fundamentals Largely Unrelated To Oil Prices

We do not expect low oil prices to meaningfully impact solar panel shipments or earnings for the solar stocks we cover.  In the long run, solar demand is likely to be determined by government policy, environmental standards and possibly by the price of fuels such as natural gas and coal, which power a bulk of global electricity generation. Additionally, solar energy has been becoming increasingly competitive with fossil fuels, improving the economic incentive to invest in solar projects. For instance, First Solar has signed a deal to sell electricity from one of its solar farms in New Mexico for less than $0.06 per kilowatt hour, which is almost half the average residential retail price of electricity in the United States and also well below the cost of oil and diesel-based generation. ^[1]

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1. Falling Oil Price Won’t Affect Solar Industry, SunPower CEO Says, Bloomberg, December 2014 [↩]