Shorting Oil, Hedging Tesla

[adiggs]

I agree with VA on this oil stuff. My question for the forum is when do I start shorting OIL for the long drop into obscurity. My current plan is to use this drop as a hedge for the upcoming recession. No one knows when it will be or how big of a retrenchment it will be, but it will happen and there is little doubt. I think Oil will be one of the hardest hit in recession because of the timing as it relates to less dependence and ever increasing supply. The other question is whats better to short, OIL the commodity or oil companies. One issue that I am having is that Nat Gas will still be valuable for a lot longer then some of oils other byproducts which makes me lean towards the commodity rather then the companies. Right now, im targeting about 3-6 months after the Saudi Aramco deal because i think they will pump the price of oil up going into that event and I want to start shorting at the highs. I think am thinking a simple ETF like USOD or DRIP for companies, would love recommendations.

I agree withthe general thinking @Reciprocity . However I've concluded for myself that trying to short oil will have too short of a time window for me to pull off reliably.

The analog I'm using for oil is what's happened to public coal companies in the US. There's been a pair of graphs posted previously that show market capitalization for coal companies from roughly 2007 through 2017 (down 99.9% - what a short!) and coal unit volumes over a similar time period - down 20%. The coal industry has a bare smidge of it's former market cap, but it's unit volumes, revenue and other measures of activity are still a significant fraction of it's former glory. It's not going away fast, and my best guess is it's still got 1-2 decades of fading away to do before it disappears from power generation complete (still nearly 1/3rd of electricity generation last I looked).

The difficulty is where do you find a 10 year affordable short? I don't know a way to do that.


I guess fo rme, I see it, but the slide into obscurity is so long, it makes it hard to pick a window where the slide is fast / abrupt enough to make money on the short.

 

[dc_h]

Sure, one 2GW solar farm offsetting production previously sourced from oil might be small, but scale it up by 25 of these and the numbers are significant. There's a lot of desert(and demand) out there in the ME.

0.0016 barrels of oil to produce 1 kWh
1,500,000 kW @ peak = 2,400 b/hour
6 sun hours per day = 14,400 b/day
25 similar regional plants = 360,000 b/day in decreased demand

China is looking like it will install more than 60GW of solar this year and probably more than 100GW next year. In theory they could start closing 50 to 100 coal fired plants every year. Doesn’t impact oil directly, but it should also put pressure on mat gas prices, which hurts oil producers. It will start impacting coal miners in the USA and Australia pretty soon.
The Middle East is probably the only region where solar directly replaces crude oil products. If it improves electricity availability and pricing it should improve EV demand long term.

 

[jhm]

This backwardation is quite a trip. The front end for WTI is just under $55 while 2020 is under $51. That's a $4 decline in less than 3 years. The low prices a few years out will keep production subdued, while the high front end will squeeze oil out of inventory.

It'll be interesting to see how long this will hold up. Once the middle futures curve rises, shale oil will ramp up again. Or if producers just gain confidence that prices will come in above the futures curve, production could step up again. If that were to happen, we could see a flip to contango again, collapsing at the front end.

 

[ValueAnalyst]

Is anyone here short oil?

 

[Oil4AsphaultOnly]

Is anyone here short oil?

I am, via SCO (although I guess that's not "technically" short?). I have a Jan18 $30 put option. Will add to it if it drops further. I see your point about there potentially being one more spike in crude prices, but think such a spike would be short-lived, as it would only accelerate the deployment of non-fossil fuels as a financial decision. And as crude prices rise, so will non-compliance from OPEC nations that see the writing on the wall.

 

[ValueAnalyst]

China to ban high-sulfur diesel used by tractors, ships from November 1

 

[ValueAnalyst]

I am, via SCO (although I guess that's not "technically" short?). I have a Jan18 $30 put option. Will add to it if it drops further. I see your point about there potentially being one more spike in crude prices, but think such a spike would be short-lived, as it would only accelerate the deployment of non-fossil fuels as a financial decision. And as crude prices rise, so will non-compliance from OPEC nations that see the writing on the wall.

I think inherent in your thesis is that the OPEC nations will be able to produce the oil in the ground when they "see the writing on the wall." This is not necessarily true as OPEC nations cannot produce 100 mbd. They can produce the first ~30-35 mbd, and the rest must be produced elsewhere, and usually with much higher marginal cost around ~$100. That's where the prices will have to go in the next few months, before oil goes away forever after 2030. Oil production takes years of planning and investment, which has been absent for three years.

I do see compliance to cuts dropping off in 1Q18, but not because they "saw the writing on the wall." It will be because cuts are no longer needed, but even with max OPEC production, prices will continue to rise for some time. Because of lack of investment for three years, oil supply is shot for the next few years. Tesla is the only solution, but unfortunately Tesla can't ramp quickly enough to make even a dent in the structural issues in energy supply that are awaiting us.

 

[Reciprocity]

I agree withthe general thinking @Reciprocity . However I've concluded for myself that trying to short oil will have too short of a time window for me to pull off reliably.

The analog I'm using for oil is what's happened to public coal companies in the US. There's been a pair of graphs posted previously that show market capitalization for coal companies from roughly 2007 through 2017 (down 99.9% - what a short!) and coal unit volumes over a similar time period - down 20%. The coal industry has a bare smidge of it's former market cap, but it's unit volumes, revenue and other measures of activity are still a significant fraction of it's former glory. It's not going away fast, and my best guess is it's still got 1-2 decades of fading away to do before it disappears from power generation complete (still nearly 1/3rd of electricity generation last I looked).

The difficulty is where do you find a 10 year affordable short? I don't know a way to do that.


I guess fo rme, I see it, but the slide into obscurity is so long, it makes it hard to pick a window where the slide is fast / abrupt enough to make money on the short.

Im not looking at a 10 year time frame, I am looking at 2 years.. 6 months before a 1 year recession through 2 QTRs of growth in GDP after the recession that signifies, roughly, that the recession has ended. I am only talking about a short term hedge, not a long term investment. I think my long term investment is Tesla and the Oil short would be a hedge. My thought is the drops you are talking about over decades would be accelerated over a 2 year period, but would recover a bit for the rest of the decade before dropping again (I would be looking to put a hedge on again). I would be out of the investment before it started to recover and all the gains would be dropped back into Tesla or some other growth engine. Obviously timing is a major issue, but I am using U6 and this Saudi Aramco deal for timing. My thought is that Saudis are doing everything they can to keep the price up for this deal and soon after it will collapse. This combined with a recession should provide a pretty good drop for at least the duration of the recession and a few quarters after. The fully capitalize, Im looking at a 3x Inverse or short ETF. Just debating Oil the commodity and oil companies.. maybe ill just split the baby and do both.

 

[Oil4AsphaultOnly]

I think inherent in your thesis is that the OPEC nations will be able to produce the oil in the ground when they "see the writing on the wall." This is not necessarily true as OPEC nations cannot produce 100 mbd. They can produce the first ~30-35 mbd, and the rest must be produced elsewhere, and usually with much higher marginal cost around ~$100. That's where the prices will have to go in the next few months, before oil goes away forever after 2030. Oil production takes years of planning and investment, which has been absent for three years.

I do see compliance to cuts dropping off in 1Q18, but not because they "saw the writing on the wall." It will be because cuts are no longer needed, but even with max OPEC production, prices will continue to rise for some time. Because of lack of investment for three years, oil supply is shot for the next few years. Tesla is the only solution, but unfortunately Tesla can't ramp quickly enough to make even a dent in the structural issues in energy supply that are awaiting us.

The US isn't the only non-OPEC nation. And I think "Tesla is the only solution" should be re-worded to "Tesla represents the only solution". Every company (BYD, sonnentech, LG, etc) that followed Tesla's footsteps contribute to reducing that 100mbd demand. And I've only listed the companies that are selling electric semi tractors, buses, and energy storage now. There are plenty more working on bringing products to market to capitalize on a rise in crude prices.

 

[TheTalkingMule]

A good place to start woulf

Just debating Oil the commodity and oil companies.. maybe ill just split the baby and do both.

I think this first(IPO-based) bust will be a commodity short as most people don't fully understand the situation, just the stockpiles. Prices will then recover a bit and likely sit in that shale band for a couple 2-3 years, then.......boom. The companies start tumbling just like they did in coal.

 

[adiggs]

Im not looking at a 10 year time frame, I am looking at 2 years.. 6 months before a 1 year recession through 2 QTRs of growth in GDP after the recession that signifies, roughly, that the recession has ended. I am only talking about a short term hedge, not a long term investment. I think my long term investment is Tesla and the Oil short would be a hedge. My thought is the drops you are talking about over decades would be accelerated over a 2 year period, but would recover a bit for the rest of the decade before dropping again (I would be looking to put a hedge on again). I would be out of the investment before it started to recover and all the gains would be dropped back into Tesla or some other growth engine. Obviously timing is a major issue, but I am using U6 and this Saudi Aramco deal for timing. My thought is that Saudis are doing everything they can to keep the price up for this deal and soon after it will collapse. This combined with a recession should provide a pretty good drop for at least the duration of the recession and a few quarters after. The fully capitalize, Im looking at a 3x Inverse or short ETF. Just debating Oil the commodity and oil companies.. maybe ill just split the baby and do both.

The external agents / events / factors you mention you're watching to help you with the timing make a lot of sense to me.

Then the question is what will feel the pain the most - the price of oil, the stock price of companies that produce and sell oil, exploration companies, oil services industry, ... My guess is ot won't be the price of oil - it'll go down, but the leveraged impact will be seen most dramatically by the oil producers.

Good luck with that @Reciprocity. I love the idea and I want to want to play myself

 

[Reciprocity]

The external agents / events / factors you mention you're watching to help you with the timing make a lot of sense to me.

Then the question is what will feel the pain the most - the price of oil, the stock price of companies that produce and sell oil, exploration companies, oil services industry, ... My guess is ot won't be the price of oil - it'll go down, but the leveraged impact will be seen most dramatically by the oil producers.

Good luck with that @Reciprocity. I love the idea and I want to want to play myself

I hear that! If it where easy, everyone would be rich. Its also impossible to predict the recession, but a nice run up in oil and Tesla selling hundreds of thousands of EVs in the next 2 years as well as other manufactures coming out with like 400 models in the magical year of 2020 all spell doom for Oil. I will probably just spread about 1/3 of my money across a few ETFs that cover both companies and commodities. The other 2/3 will be Tesla and safe havens like Bonds or Gold.

 

[RobStark]

Awaiting Trump's coal comeback, miners reject retraining

 

[TheTalkingMule]

Is there an easy way to track weekly import to the US from the various sources? I'd love to overlay Saudi exports to the US with stockpile figures.

 

[transpondster]

only monthly IIRC
U.S. Total Crude Oil and Products Imports
edit: and weekly:
Weekly Preliminary Crude Imports by Top 10 Countries of Origin (ranking based on 2016 Petroleum Supply Monthly data)

 

[TheTalkingMule]

LOL....these weekly Saudi import figures make it clear as day they're attempting to manipulate US crude stockpiles starting this past May. 415kb/d last week, and this time last year....1170kb/d. And the pile is still there.

 

[ggies07]

Awaiting Trump's coal comeback, miners reject retraining

****ing stupid. Way to go Trump....another example of holding our nation back. #sad

Also, truck driving? Umm.....that one is also going away.....sigh....

He’s placing his hopes for the region's future on retraining. UMWA’s 64-acre campus in Prosperity, Pennsylvania - which once trained coal miners - will use nearly $3 million in federal and state grants to retrofit classrooms to teach cybersecurity, truck driving and mechanical engineering.

 

[jhm]

The Era Of Oil And Gas Is Nearing Its End | OilPrice.com

This article paints a realistic picture of an industry in decline. Oversupply becomes increasingly difficult to avoid. Only most cost competitive survive. Growth only comes through consolidation.

We've discussed these themes here, but now people in the industry are taking a hard look too.

 

[TheTalkingMule]

Boston Consulting published a study this week saying EVs+hybrids would be 48% of the market by 2030. That's a good 5-10 year leap closer than most "studies".

They also said demand would be driven only by incentive and regulation, which is laughable.

 

[SebastianR]

Look at this Didi (China’s Uber) claims to be ‘world’s largest EV fleet operator’ with 260,000 EVs, launches charging network

Stuff like that will make a dent in oil consumption. I think that's interesting from two perspectives: one it forces other folks (Uber, Lyft anyone?) to think of similar solutions if they don't want to fall behind and second it is an effective way to displace oil demand as ride-sharing cars are typically high-mileage cars.