If you follow the solar industry, you know solar stocks have been absolutely crushed in the last few months and the sell-off accelerated late last week and has continued today. The cause is simple: OPEC.
OPEC decided to stand pat on its oil production target, effectively ensuring oil prices will be low in the immediate future. If oil prices are low, profits in the energy sector will fall, meaning energy companies are worth less.
This logic works for oil companies, but why are solar stocks down?
Source: SunPower.
Solar energy and the rest of energy
When traders look at energy, they often lump all energy stocks together, and for a long time, that logic made sense. Oil stocks trade with natural gas stocks, which are correlated to service providers and affect airlines, chemical companies, etc.
But solar energy is an industry all its own and sees very little to no direct impact from falling oil prices. The reason is that solar energy creates electricity, and oil is used primarily for transportation. Solar energy doesn't lose its competitive position if oil prices fall because they aren't direct competitors in most of the world.
Natural gas is an energy source that you could argue should be somewhat correlated with solar stocks, but as you can see below, natural gas is flat in the last three months, and solar stocks are following oil lower.
Henry Hub Natural Gas Spot Price data by YCharts.
There's no doubt traders are correlating solar and oil, but there's no good reason for this correlation to take place. SunPower (SPWR 6.08%) and SolarCity (SCTY.DL) aren't competing with oil when they sell solar systems to residential or commercial customers. Utility scale plants from First Solar (FSLR 3.62%), SunPower, and SunEdison (SUNEQ) are directly competing with natural gas and coal, not oil. Still, the market doesn't seem to take this logic into account, and the solar sell-off continues.
Even if oil prices continue to fall residential solar systems will keep going up nationwide. Image source: SolarCity.
This is no time to panic
The long-term fundamentals in the solar industry are getting better by the quarter, and with solar energy costs dipping below grid parity across the globe, we should see demand increase exponentially in the next decade.
For investors, the present sell-off is a great opportunity, especially in industry-leading companies like SunPower, SolarCity, First Solar, and SunEdison. They'll all grow even if oil remains as low as it is today because that's not the commodity they're competing with.
In fact, the only things that could hold back growth in the solar industry are higher interest rates or a deceleration of cost reductions within the industry. But if interest rates remain low and costs keep coming down, the solar industry is going to keep disrupting the multitrillion-dollar energy market.
