A trading play on long-term energy trends

Michael Taylor looks beyond the short-term fluctuations in gas prices to a longer-term trend for his trading idea this week

September 29, 2021

by Michael Taylor

Energy input prices are soaring
The world needs a dependable and clean transition fuel
The uranium market is playing catch-up

The theme everybody is talking about is gas prices. These are printing new highs almost daily and are over 10 times above the low in 2020. This means several things. First, it’s going to cost people more to heat their homes. What does that mean? It means consumer discretionary spending may go down as disposable income is eaten away by higher bills. Secondly, it’s going to mean higher prices for businesses, especially consumer-facing oness. And why can’t what is happening in natural gas happen in oil? We’re already seeing Brent print over $80 a barrel for the first time since 2018. All commodities are ripping higher. My last article looked at Petra Diamonds (PDL) and this is another market with companies seemingly hesitant to bring idled supply back online.

It's also clear that we’re still reliant on dirty fuels and that the idea of a transition to clean energy is a stretch. We need a power source that is always available (unlike wind and hydro) and also clean. Nuclear can help in that transition. It’s not the most loved commodity and people are still scared of living next to a nuclear power station. The reality is that it’s not that scary (I lived next to one for half of my life) – and nuclear is dependable.

The uranium market went through a huge bubble in the early 2000s. Part of this was speculation and another reason was that Cigar Lake flooded, curtailing production. Prices soared to around $140 before collapsing. To stick the boot in further, Fukushima nuclear disaster happened. Japan – a key player in the uranium market – decided to close down its reactors. Germany followed suit. The bear market reared its ugly head and an excess of stock required years and years to be worked through.

Uranium's time to shine?

Ten years later, we’re seeing gas prices soar. Brent is going higher. Coal has multiplied several times from its lows. It’s clear that we need a sensible transition. This is why sentiment towards nuclear is starting to change – and with nuclear we need uranium.

Yellow Cake (YCA) listed in July 2018 with the goal of buying and storing physical uranium oxide. It can be considered an attempt to corner the market, if you like, although most supply is contracted or sold years in advance. It has a key contract with the one of the largest producers of uranium worldwide, Kazatomprom (KAP). Yellow Cake buys physical uranium at an agreed price before it is announced to the market. This means that it is able to buy uranium without moving the market because the market only learns of the transaction once the deal is announced. Therefore, any price rise in the commodity is passed on to shareholders because the company is not chasing the price and bidding higher. For example, when Gordon Brown announced that the UK intended to sell its reserves of gold, the price of gold fell. If you know there is a big seller in the market, why buy? You can just wait for them to sell and bid them at lower prices. Yellow Cake avoids situations like this by dealing in pre-agreed transactions.

We can see in Chart 1 that the price of Yellow Cake had a quick start out of the blocks, but this rally failed to hold. 2020 saw a heavy fall in the price along with most other UK equities in the coronavirus crash and then a solid rebound. The stock is closely correlated with the uranium price, which is now starting to trend upwards. The price recorded its lowest monthly price in November 2016 at a price of $18 (Cameco’s website), and is currently $34.25 as of 31 August 2021.

Moving down to Chart 2, we can see the stock start to hit resistance around 280p. It also bounced three times from the 200-day exponential moving average (pink line), forming a bullish wedge.

Volumes picking up

I’ve also marked an arrow from March 2021 where we can see the volume begin to increase. There is a marked change from this arrow which shows signs of accumulation.

We can then see the stock break out in early September 2021 on high volume and high volatility. When stocks move from extended periods of sideways trading the volatility often increases and we can see that here. I am long Yellow Cake already and intend to add to my position if the stock can break the closing high of 370p. One advantage of Yellow Cake is that it is SETS-traded, which means we can load our orders directly onto the electronic order book and don’t need to deal with market makers. Stop-limit orders can be used to deal when we are not at the screen.

There are several ways to play uranium and I believe that Yellow Cake is the best option on the London listed markets. There is no exploration risk unlike many of the uranium miners – but like the uranium miners the stock is correlated towards its underlying commodity. While sentiment is shifting towards nuclear, there is no guarantee of this continuing. Furthermore, any more disasters similar to the Fukushima incident in 2011 will harm the case for nuclear.

There are never any guarantees in trading but I believe the trend towards support for nuclear is going to continue – especially as gas prices rise ever-higher.