ValueAnalyst
Closed
I'm pretty sure I followed those with, "unless Tesla ****s up Model 3 ramp in a big way," which they did...
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I'm pretty sure I followed those with, "unless Tesla ****s up Model 3 ramp in a big way," which they did...
Keep in mind that all market participants are inexperienced with oil getting disrupted by new technologies. And those with the most experience within an incumbent industry tend to be least able to perceive disruption until serious damage has already occurred.
Specifically, @neroden's analysis is focused on events 7 to 15 years out. So I don't read him as suggesting anything about near term shorting. All of us here have contemplated the potential for oil to cycle into tight supply and high price prior to a consumption peak, zero growth (my focus) or absolute decline faster than natural decline (@neroden's focus). These two events are out around 2025 and 2030 respectively. Neither of these future events are necessarily a shorting opportunity in the near term.
Now you seem to want to bring in another scenario, that of peak supply, an inability of producers to increase production. You seem to accept that low price may be a contributor, while I take an absolute view. That is, I see peak supply as an inability to increase production at any price. That's a fair distinction. In either case, we can agree that increasing production has become more costly over the years. Thus, at some point producers will need a higher price to increase production. At that point, either the price rise high enough and product increases or prices remain too low and production falls. I'm not convinced I know enough to rule out either scenario. The possibility that is psychologically harder for oil insiders to accept is that prices need not rise high enough to increase production. How much experience does the industry have with that? I think the only examples are during economic recessions, but recessions are well understood as periods of economic contraction after which growth may resume. But the significance of peak supply is that incremental supply becomes more costly than the market is willing to bear even through a time of economic expansion.
I'm sure old timers will tell you that oil market just doesn't work like that cuz of all that thirst for liquid fuels. But geologically it must happen. There is a limit to how much a barrel of oil is worth, and once the marginal cost of producing oil exceeds the economic value of oil, production and consumption will both fall. What's that price? $250? $150? $115? $95? $85? At what price does consumption decline?
SebastianR
Active Member
I agree with your assessment of the work of @neroden - it is a great piece of analysis. It is not usable for short term trading / shorting. But of course if you are a long-term investor and your primary goal is wealth preservation rather than speculation - then getting out of fossil fuels is good investment advice (it has been for a few years and it will be for the next 50 years). In essence that's what the folks over at http://fossilfreeindexes.com/ say and that's what most recently the Norwegian's have said, too.
I think that price is hard to determine not just because of economics but because of politics: energy independence, global warming, petro dollar considerations they all influence the oil price.
For the time being, I don't see a reason for any kind of panic: the current oil price is the reflection of a monopolistic move to restrict oil supply to key markets artificially. I will start taking oil supply investment issues serious once OPEC is pumping what they can, Venezuela, Russia & Co. all online and we still see dwindling stocks. As far as I can tell we are far from this point in time.
If you thin of the current oil price as the reflection of a cartel move to restrict supply... it should be really scary for US oil investors in the short term. Because the cartel can't keep the price over $60, and the frackers aren't profitable below $30. When the cartel suffers defection (as it usually does), it's going to drive all the frackers out of business overnight. But gasoline and diesel will *still* be much more expensive than electricity for transportation!
SebastianR
Active Member
I guess this is where we come back to the term "shale bubble". And it is interesting: OPEC wants the price up and thus currently loses market share (also ref. to the appeals of OPEC to the shale folks to contribute their share to the production cuts that we ridiculed a while back). Of course the Saudis could go full reversal again soon (after the Aramco IPO is dealt with?) and flood the market with cheap oil to gain market share back.
The only player that seems to be positioning itself really well in this game seems to be China: Oil prices are down? Fill the reserve like there is nothing else. Oilpirces above 100 USD? No reserve filling needed and the domestic market can be stabilised dispensing from the reserve.
On top of that they have their EV mandates and look what that may do to prices.... China's EV Plan Could Cause An Oil Price Crash | OilPrice.com
(we all know this, but oilprice.com seems to just have woken up to this)
ValueAnalyst
Closed
This is an elementary view... which is not surprising given your other posts. You've been reading too much Bloomberg.
Oil prices would rise in 2018/19/20 even if OPEC decided tomorrow to end production cuts and boost supply.
TheTalkingMule
Distributed Energy Enthusiast
Monthly US imports are the lowest since the oil embargo in 1973, shale is still accelerating, and OPEC is holding back as much production as is politically possible. And US stockpiles are still around where they were a year ago.
TheTalkingMule
Distributed Energy Enthusiast
Please stop this sophomoric condescension. There is no need to be dissing neroden. It's not making you case believable.
Your second paragraph is patently absurd. If prices were destined to go up without a production cut, OPEC would not have extended the cuts another 9 months. Actions do speak louder than words. As long as OPEC is withholding supply I see no need to worry about imminent peak oil supply. According to BP, OPEC proven oil reserves are more than 84 times annual production, while non-OPEC is at 25 times production. The willingness of OPEC to tap their reserves is the supply issue, not geology. Of course, the price of oil is still low enough that non-OPEC producers lack motivation to explore for new oil. OPEC would love to bring back the days when non-OPEC would spend $15/b just to find new reserves.
That cost of replace reserves was the essential premium that Saudi Arabia and others extracted from the oil market. $8/b for Saudi oil reserves is exactly that basis MbS has for thinking Aramco is worth $2T. They have the absurd notion that you can price 265B barrels of reserves at $2T, even though they are producing a mere 1.7% of that per year. It makes no financial sense, and yet they probably think that an oil scarcity argument would help their case. How convenient.
ValueAnalyst
Closed
Reserves don't mean production can increase. Earth has large reserves of nickel too, but do you see production all of a suddenly doubling or tripling at $5/lb? Probably not, right? There is no "cartel" restricting nickel supply...
Price must be right. Global oil production will not increase enough to offset demand increase at $60. Cartel or no cartel.
Why Battery Cost Could Put the Brakes on Electric Car Sales
It seems that BNEF may be moving the goal posts on EVs. Now they are claiming that the sticker price on EVs need to be cheaper than gas cars. This ignores savings on fuel and maintenance and many other perks. Thus they envision that EV prices need to fall to $28k for a midsize sedan, and to get there battery prices must fall to $100/kWh.
Okay, I'm cool with $100/kWh, but I don't see $125/kWh as much of a barrier as they do. Moreover, as we've discussed before they see batteries cost falling only 10%/y from $280 in 2016 to $100 by 2026. What they fail to point out is that moderate faster price declines make a huge difference in how quickly we reach the $100 mark. Ten percent takes 10 years, 12%/y takes 8, and 15%/y is just 6 years away to reach sticker price parity in 2022. Meanwhile, the cost has been falling in recent years by 20%/y. Continuing at that pace just a couple more years will make a huge difference in time frame.
Of course, we are know that Musk has been saying that Tesla would realize $100/kWh pack cost by 2020. Now the price gap between the 500 mile range Semi and it's 300 mile little brother is just $30k. This has got to be quite close to $100/kWh, as gaining 200 miles range from just 300kWh more battery would imply 1.5kWh/mile efficiency on a taller and heavier truck. So it is hard to see how the price differential is anything more than Tesla's battery cost at $100/kWh. Either Tesla's battery cost is less than that or they aren't making any incremental income on a higher value product. I believe Tesla is tipping their hand here, and they see a path below $100/kWh by 2019.
So Bloomberg can move the goal posts all they want, but Tesla is not 1st and 10. Tesla looks to be 1st and goal.
It seems that BNEF may be moving the goal posts on EVs. Now they are claiming that the sticker price on EVs need to be cheaper than gas cars. This ignores savings on fuel and maintenance and many other perks. Thus they envision that EV prices need to fall to $28k for a midsize sedan, and to get there battery prices must fall to $100/kWh.
Okay, I'm cool with $100/kWh, but I don't see $125/kWh as much of a barrier as they do. Moreover, as we've discussed before they see batteries cost falling only 10%/y from $280 in 2016 to $100 by 2026. What they fail to point out is that moderate faster price declines make a huge difference in how quickly we reach the $100 mark. Ten percent takes 10 years, 12%/y takes 8, and 15%/y is just 6 years away to reach sticker price parity in 2022. Meanwhile, the cost has been falling in recent years by 20%/y. Continuing at that pace just a couple more years will make a huge difference in time frame.
Of course, we are know that Musk has been saying that Tesla would realize $100/kWh pack cost by 2020. Now the price gap between the 500 mile range Semi and it's 300 mile little brother is just $30k. This has got to be quite close to $100/kWh, as gaining 200 miles range from just 300kWh more battery would imply 1.5kWh/mile efficiency on a taller and heavier truck. So it is hard to see how the price differential is anything more than Tesla's battery cost at $100/kWh. Either Tesla's battery cost is less than that or they aren't making any incremental income on a higher value product. I believe Tesla is tipping their hand here, and they see a path below $100/kWh by 2019.
So Bloomberg can move the goal posts all they want, but Tesla is not 1st and 10. Tesla looks to be 1st and goal.
I understand the difference between reserves and production. But OPEC is not even trying to increase production, and it is nonsense to buy into geological constraints as the reason they are not increasing production.
Let's talk about $60/b. Why is this not enough to induce OPEC and Russia to increase production? Do you think that it would be unprofitable for the whole cartel? Or do they simply think that the market will bear a higher price if they continue to withhold supply? If Saudi Arabia can't turn a profit at $60, then we really are in a pickle. But more to the the point a production cut agreement would be wholly unnecessary. Producers with a breakeven well above $60 don't need to be told not to drill.
It seems fairly clear that when OPEC and Russia agree to a 9 month extension, they are simply holding out for a better price. And, fair enough, they are free to hold out for any price they require. But you are still basing your bullishness on the policy of OPEC. Once members break rank and drill at will, the price can tumble right back down. This is also why I am no longer shorting oil. OPEC can effect enough coordination in the market to keep supply tight. I don't know how far they can push that, so I am not going to bet against them. So you think OPEC will hold out Brent $70? Even if you are right about a deficit at $60, is there much upside?
ValueAnalyst
Closed
You’re putting words in my mouth instead of listening to what i say.
Forget OPEC. If there was no OPEC, what would be the equilibrium price today? I estimate above $100, but this is hard to predict. Easier to observe how global demand/supply changes as prices move. Right now, at $60, demand is surging, supply isn’t. So equilibrium is above $60. The rest is conspiracy theories.
Okay, I've got to chime in on this. That is patently ABSURD! So you're saying that without a cartel (like diamonds by deBeers) to artificially control and limit supply, that the market price of a commodity would be HIGHER?! That goes directly counter to the role of cartels.
Edit: spelling.
Edit2: The fact that you would claim that the market behaviour is running counter to the very definition of a cartel shows that the root cause is a lack of demand, not supply. Lose the cartel, and prices should fall, not rise (because supply would rise).
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ValueAnalyst
Closed
Ok. Since everyone here seems to think my points are "patently absurd," and I think no one here is actually interested in discussing facts rather than wishes and dreams, I should focus on my other goals.
I'm actively betting against oil, so I could use a dose of cold-water to keep my investments in check. But you have to admit that your latest argument does not hold up right?
TheTalkingMule
Distributed Energy Enthusiast
I highly recommend the Ignore feature to those not interested in nonsensical self-promotion.
Heard part of a good BBC audio program yesterday in the car. Discussing the effects of an Iran / Saudi war and what the aftermath could be. I didn't catch the entire show, I'll have to go back and listen to it this weekend. A couple short takeaways: Iran would use missiles to seriously damage Saudi desalination infrastructure, leading to a massive water shortage that could not be fixed in any reasonable time frame. The oil infrastructure would also be targeted, leading to a tremendous spike in the price of oil.
Bottom line was that the Middle East would be toast. Welcome back too the middle ages...
BBC World Service - The Inquiry, What Would an Iran-Saudi Arabia War Look Like?
Bottom line was that the Middle East would be toast. Welcome back too the middle ages...
BBC World Service - The Inquiry, What Would an Iran-Saudi Arabia War Look Like?
ValueAnalyst
Closed
Ok. I've warned everyone here against shorting oil many times, before prices surged 40%. This is just the beginning.
Most oil bears are confused by baseless conspiracy theories related to OPEC and Aramco IPO, as well as dreams and wishes about shale oil production, which comprises 2% of global supply, making up for the accelerated declines in the remaining 98%, and/or a few million EV's negating the global oil demand from the quickly growing global vehicle fleet. If you're interested in reading about such wishes and dreams, be my guest, but I will not waste my time on this nonsense any longer.
If you choose to bet against oil and lose your shirt, I will feel sorry, but I honestly did all I can.
ValueAnalyst
Closed
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