Why Both EV Stocks And Big Oil Are Rallying

One of the main things that attracted me to the energy markets a decade or so ago was that it is an area of the global economy that is a state of flux. Concerns about the environmental impact of fossil fuels have prompted interest and investment in alternatives and rapidly advancing technology has benefitted both those industries and traditional oil and gas businesses. For a trader, that translates to volatility no matter what the broader markets are doing and, as I learned early in life, in trading movement equals money.

That continuing struggle between conventional and alternative energy is usually painted as a zero-sum game, where the rise of one inevitably means the fall of the other, but this year has shown that that is not always the case. Eventually, decades from now, that will probably be true. For now, though, the sheer size of the global energy market and its sustained growth surge as we all become increasingly dependent on electronic devices means that big oil companies can continue to grow, even as alternatives gain ground.

That explains why, in recent days, two seemingly opposite sides of the coin, Tesla (TSLA) and Chevron (CVX), can both report good third quarters and show massive one-year gains in their stocks.

Tesla once again made fools of the Wall Street analysts by nearly doubling their forecast earnings last week, while Chevron this morning reported EPS of $2.96, a comprehensive beat of the consensus estimates for $2.21. If the zero-sum theory of energy were correct, that wouldn’t be possible, but there is one number that explains why it is so.

That number is four.

As strange as it may be to those of us who live in wealthy areas of a wealthy country and increasingly see Tesla’s and other EVs on the road, only four percent of global vehicle sales right now are EVs. That means that while there is still massive potential for TSLA and other specialist firms such as Lucid (LCID), whose stock has jumped over the last couple of days as they make the transition from an idea to a company that actually makes and sells things, there is still a gigantic market for oil.

That may sound obvious, but the dominant narrative, that oil companies are being beaten down right now as the world moves away from fossil fuels, completely ignores it. That is why a company like Chevron can produce nearly $22 billion of EBITDA and over $10 billion in free cash flow, but still trade at a forward P/E of under 15. It is also why there is still plenty of opportunity in conventional oil stocks, despite the pessimism and even after a strong year in the energy sector.

That doesn’t mean there aren’t some areas of conventional energy markets that are destined to give back gains when they make them. That is why I suggested a short in BTU last week, for example, a trade that has worked out well. There will also be occasional short-term reasons to take profit on oil stocks such as I outlined a couple of weeks ago, but I will be reinvesting those profits in the sector if the weakness that I expect over the next couple of months materializes. I will also, however, maintain my long-term holding in TSLA. In this case, the fact that only 4% of vehicle sales are EVs mean that, when it comes to energy investing, you can have your cake and eat it too.