The gas crisis trade is back (thanks Victoria) and the stock picks after the last one are up some 40%

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Just when you thought it was safe to get back in the hot water, the chiefs in charge of keeping the lights on – literally – the Australian Energy Market Operator, broke the glass on the emergency (panic) gas button again late on Tuesday.

The last time AEMO swung the axe, it triggered a bit of a mini-bull run in the ASX energy sector which has been popping eyes worldwide. What this second intervention might do is anyone’s guess.

It’s only the second time AEMO has stepped in to quell an operating market. Last month when Saxo markets senior market strategist  – their Jessica Amir – told our Jessica Cummins that the average household energy bill will likely rise by 14% in the second half of this year, it was almost too hard to hear.

Now that number’s looking conservative, as the latest regulatory intervention sparked Tuesday night at about beer o’clock is pretty much down to everyone in Victoria. The national problem child.

Victoria.

Where, if they’re not getting smashed by COVID, they’re triggering the emergency gas supply guarantee mechanism.

AEMO doesn’t want to – helping deal with Victorian energy shortfalls as the docile national electricity market lurches from one crisis to another is not part of its ideal day at the office – but there’s not a whole lot of options out there.

Just last week, the energy regulator warned if the gas at Lochard Energy’s Iona storage plant keeps getting hoovered out at the current rate and falls to near-record levels – which it has – then it will be forced to put on the yellow jacket and step in to guarantee gas supply for electricity generators.

But being magnanimous, it’s not all Vic. The problem is driven by rocketing east-coast demand, but Victoria is the only place in Australia where a $40 per gigajoule cap on gas prices remains in place to ensure wholesale prices don’t fly off the handle.

Now AEMO has confirmed storage at Iona has dropped to a record low and its under an official system security threat until the end of September.

The Gas Supply Guarantee mechanism to secure more gas out of Queensland for the National Electricity Market (NEM) has been activated, AEMO says.

The mechanism has only been tripped twice since introduction in 2017, just weeks after the NEM was suspended amid a global energy crunch.

“Challenging generation conditions experienced from early June continue in the NEM. This has resulted in a greater reliance on gas-powered generation and larger than forecast inventory reduction at the Iona gas storage facility in Victoria,” AEMO said.

In response, the regulator pulled out the big guns in two shifts – first banning purchases from Victoria’s Domestic Wholesale Gas Market (DWGM) to supply other jurisdictions, and now banning purchases for Victorian electricity generation fullstop.

At this stage, AEMO reckons, there’ll be no impact to gas supply.

The fresh crisis comes as Victoria says it will end incentives for residential gas products by the end of next year as it wants Victorians to maybe get some sustainable alternatives going.

The state government  released a plan on the weekend – a little bloody late, but hey –  involving electrification and the use of hydrogen and biomethane to cut bills and emissions.

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The problem is those solutions are still pipe dreams which is why there’s been such incredible action in the local energy sector. It rose almost 3% yesterday, while every other sector, bar utilities, fell.

As Saxo Jessica told Stockhead Jessica, energy companies will see some of the highest earnings growth in the year ahead and can withstand the mega-rate hikes to offset inflation.

“These companies are key contributors to inflation, all on the other side of making money from high inflation,” Amir said.

While there’s always space for balance, the perfect approach to a healthy energy investment diet,  Amir’s coal picks have been absolutely prescient.

This is where her three top stocks are one month later:

WHC is continuing to hit all-time highs but it has taken a haircut due to the downturn in markets, Amir said.

“We must remember, though, financial year rebalancing is taking place, so this is a time when fund managers take the top off their best performers and lock in profits for the financial year ending 30 June.

“We see opportunity in WHC coal – it’s not just Saxo saying coal prices will hit high levels this year, the Energy Information Administration (EIA) – the peak energy body, is guiding for the same.”

It is also worthwhile keeping a smaller company on your radar.

“New Hope Corporation are in a similar ilk, they are just continuing to hit new record highs and experiencing a pullback, but there could be some good opportunities ahead amid strong earnings growth,” she said.

“Next pick is a much smaller company, so approach this one with utmost caution,” Amir said.

“SMR are in a sharp downturn, but they are about to outlay a wad of cash to BHP for the acquisition of their coal assets.

“Depending on time horizons, I think there could be some opportunity to look at SMR.”

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