What happened 

Solar energy stocks had a great week this week as tailwinds from energy markets and financial markets played in the industry's favor. Not only does it look like oil and natural gas prices will remain high for the foreseeable future -- potentially driving homeowners to consider solar -- interest rates are dropping, which should lead to higher margins for solar installers. 

Gains were broad-based, but there were some notable movers to lead the market. SunPower (NASDAQ:SPWR) was up 14.7% in the first four days of trading this week, Sunrun (NASDAQ:RUN) rose 14.3%, SolarEdge Technologies (NASDAQ:SEDG) jumped 16.7%, and Sunnova Energy (NYSE:NOVA) was up 13.4% to round out residential solar stocks. On the manufacturing side of the industry, Daqo New Energy (NYSE:DQ) was up 13.4% in the first four days of trading. 

Home with solar panels on the roof on a sunny day.

Image source: Getty Images.

So what

In the past week, there's been an increasing flow of news about higher oil and natural gas prices in the U.S., which look like they're going to last a while. You can see below that both oil and natural gas prices have been rising for months, but that hasn't really impacted solar energy stocks until recently. 

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

I went through some of the industry dynamics earlier this month, which you can read about here, but the short story is that demand for energy commodities has returned to pre-pandemic levels but production is down because of capital spending cuts made over the past 18 months. That's leading to sharply higher prices and unless we see energy companies invest in more drilling, the increase may last a while. 

How do oil and natural gas prices impact solar energy stocks? They may not directly, but if natural gas heating prices are up this winter and electricity prices rise it could make residential solar more compelling for homeowners. It's no surprise, then, that most of the market leaders this week are companies that focus on residential solar installations. 

The other major factor driving solar energy stocks this week is interest rates. Since solar projects are normally financed over 20 or 30 years, the rate a company can finance projects at is very important. Lower rates mean companies can sell projects or financing for more money (i.e., higher margins) and higher interest rates mean the value of projects falls. The 10-year Treasury rate in the U.S. fell from 1.61% at the market's close last Friday to 1.51% at the close on Thursday, a sharp drop for a single week. Rates have gone up to end the week, trading at a 1.57% yield as I'm writing, but the overall rise in rates we've seen the past few months seems to have taken a breather.

Now what

While solar energy doesn't normally compete with oil and natural gas directly, there should be a tailwind for the industry if energy commodities get more expensive overall. Higher natural gas prices make rooftop solar more appealing, while higher oil prices make electric vehicles more appealing and EV owners are likely to have rooftop solar as well. Add in lower interest rates and it's a good week to be bullish on solar stocks. 

These trends can reverse course as fast as they came, but for now, the market's winds are favoring the solar energy industry. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.