Shorting Oil, Hedging Tesla

[GoTslaGo]

Venezuela is teetering on an economic cliff about to nosedive into the abyss. So why are they only pumping oil at half capacity? Isn't this the exact time you should be blowing past your OPEC issued ceiling and maximizing revenue?

Politics:

How Venezuela Ruined Its Oil Industry

 

[TheTalkingMule]

It's not clear how much this demand is influenced by EVs, as it seems be focused on GDP growth. But let's try to get a rough estimate of EV impact to tell if forecasters really ought to be looking into this.

Don't forget strategic reserves in China. If they're sitting on a billion barrels, how much longer will reserve expansion make up a million plus barrels per day?

 

[jhm]

Don't forget strategic reserves in China. If they're sitting on a billion barrels, how much longer will reserve expansion make up a million plus barrels per day?

Right, hopefully these consumption metrics are not including volumes going into storage. China has become the largest import market, but declining domestic production is a big driver.

I suspect China could easily slow the reserve build by a few 100 mb/d just to balk at oil priced over $70.

What's interesting to think about is how China will manage its stockpile as domestic consumption peaks and declines. By 2021 China could have enough battery and EV production capacity to displace over 500kb/d of oil consumption each year. That easily doubles every 2 years. Say 1mb/d in 2023 and 2mb/d in 2025. This gets China into a range where they can knock out all global demand growth in oil. So the Chinese government will have two powerful levers in their hands for manipulating the oil market: massive SPR and critical EV/battery capacity. The second lever eventually undermine the first lever. Moreover, why would China want to hoard oil when EVs are driving oil prices reliably below $40, or even below $30? So it seems China may want to pull back on the SPR lever before global demand goes into decline. So I envision that over the next few years China may want to gradually slow the rate of stock build to zero by the time domestic consumption hits zero growth. So we're looking at pulling back stock build 200 to 300 kb/d each year. If this view is nearly correct, then the SPR will act as a multiplier of EV effect. For example, EV displacement in 2018 could be about 130 kb/d while stock build pull back is say another 260 kb/d. Collectively, this impacts import demand to the tune of 390 kb/d. And here we are still 3 or 4 years before the China peak. This sort of softening of global demand would be hard for the oil market to digest. Basically, this sort of multiplier effect could pull forward the global peak several years earlier so that the global peak happens within about two years of the China peak. Essentially, the massive SPR has already pulled demand forward, so it is just a question of how quickly China closes off the intake valve.

Another dimension here is that China may be using its SPR to avoid having to build out more import terminal capacity. Once they hit peak oil imports, they have all the oil import infrastructure they will ever need. So if you know that demand will peak in a certain timeframe, you can crank up stockpiling in the near term to avoid building out import capacity that will be unneeded post peak. China may have correctly understood that it had a choice between building out more import terminal or building storage capacity and filling up reserves. Both are expensive infrastructure spends, but storage gives the country much more flexibility to manage currency, oil prices and supply disruptions.

 

[RubberToe]

If they're sitting on a billion barrels, how much longer will reserve expansion make up a million plus barrels per day?

I know, I know !

<=1000 days

RT

 

[TheTalkingMule]

It'll be interesting to see the impact of rising rates on all this oil hoarding and hiding. A lot of global activity seems overly reliant of financing.

Hoarding(China), hiding(Saudis), and fracking(US) all change dramatically when you actually have to pay for it.

 

[dc_h]

Venezuela is teetering on an economic cliff about to nosedive into the abyss. So why are they only pumping oil at half capacity? Isn't this the exact time you should be blowing past your OPEC issued ceiling and maximizing revenue?

They have replaced oil people with military and political cronies and take every dime needed to keep production flowing for the same political crooks. The pot of frogs is very nearly boiling and they don’t know how to jump out, they only know how to force the entire population to stay in the water with them.

 

[dc_h]

Right, hopefully these consumption metrics are not including volumes going into storage. China has become the largest import market, but declining domestic production is a big driver.

I suspect China could easily slow the reserve build by a few 100 mb/d just to balk at oil priced over $70.

What's interesting to think about is how China will manage its stockpile as domestic consumption peaks and declines. By 2021 China could have enough battery and EV production capacity to displace over 500kb/d of oil consumption each year. That easily doubles every 2 years. Say 1mb/d in 2023 and 2mb/d in 2025. This gets China into a range where they can knock out all global demand growth in oil. So the Chinese government will have two powerful levers in their hands for manipulating the oil market: massive SPR and critical EV/battery capacity. The second lever eventually undermine the first lever. Moreover, why would China want to hoard oil when EVs are driving oil prices reliably below $40, or even below $30? So it seems China may want to pull back on the SPR lever before global demand goes into decline. So I envision that over the next few years China may want to gradually slow the rate of stock build to zero by the time domestic consumption hits zero growth. So we're looking at pulling back stock build 200 to 300 kb/d each year. If this view is nearly correct, then the SPR will act as a multiplier of EV effect. For example, EV displacement in 2018 could be about 130 kb/d while stock build pull back is say another 260 kb/d. Collectively, this impacts import demand to the tune of 390 kb/d. And here we are still 3 or 4 years before the China peak. This sort of softening of global demand would be hard for the oil market to digest. Basically, this sort of multiplier effect could pull forward the global peak several years earlier so that the global peak happens within about two years of the China peak. Essentially, the massive SPR has already pulled demand forward, so it is just a question of how quickly China closes off the intake valve.

Another dimension here is that China may be using its SPR to avoid having to build out more import terminal capacity. Once they hit peak oil imports, they have all the oil import infrastructure they will ever need. So if you know that demand will peak in a certain timeframe, you can crank up stockpiling in the near term to avoid building out import capacity that will be unneeded post peak. China may have correctly understood that it had a choice between building out more import terminal or building storage capacity and filling up reserves. Both are expensive infrastructure spends, but storage gives the country much more flexibility to manage currency, oil prices and supply disruptions.

Does China have a blind faith price of oil? Buy like hell under $50, keep buying some under $70 , maintain over $70 and sell over$100?

 

[jhm]

Does China have a blind faith price of oil? Buy like hell under $50, keep buying some under $70 , maintain over $70 and sell over$100?

I have not encountered any explicit evidence for this. But at some level it seems price must play a role setting policy.

They clearly have an economic interest in assuring a stable supply of oil. So buying low helps to keep producers pumping, while selling very high protects the economy from oil shock.

Right now, China benefits from stable oil prices. However, when China has sufficiently built up its battery and EV production, it may actually benefit from instability in the oil markets, as that volatility would increase demand for EVs and batteries. But I think that time comes after China has significant EV penetration domestically. The point is that their domestic economy would be robust to oil prices while the rest of the world is still oil dependent. At such a point, they can export EV and battery products to nations that are desperate to reduce their oil dependency. In effect, the capacity to crank out batteries, wind and solar at massive scale is a hedge against oil price volatility as is a massive oil stockpile.

Every oil importing country really ought to be working on a resiliency plan for managing oil prices above $100. At that level, a national economy can be put at severe risk for a recession. Economic warfare is a very real threat.

 

[jhm]

Clean Energy Stocks Outperform Oil And Gas | OilPrice.com
Yup.

However, as the As You Sow/Corporate Knights report argues, the danger is that peak demand comes unexpectedly, and that oil and gas assets are dramatically repriced downwards when the writing on the wall becomes clear. If we get to a point at which clean energy and alternative forms of transport eat into the market share of fossil fuels at an accelerating rate, and oil demand enters into a period of decline, the valuation of oil and gas assets will end up being only a fraction of what the market currently estimates.

Except, the danger is that the asset repricing could come well before demand actually hits an overall peak. “None of this portends an imminent conclusion to our fossil fuel age, but it does suggest an end to fossil fuels as a long-term growth market,” the report concludes.

The report’s authors argue that this realization is already factoring into the poor performance of the fossil fuel sector relative to clean energy companies. And even if some dismiss the long-term threat to oil and gas, the recent investor return numbers simply don’t lie.

“Oil prices have spiked by almost 40% over the past year and half, and clean energy stocks have almost doubled the fossil fuel stocks performance over this time,” Toby Heaps of Corporate Knights said. “While there may be brief periods where clean energy stocks under-perform fossil fuels stocks going forward, high fossil fuel prices just pave the way for more demand of clean energy products and services.”

 

[jhm]

Explaining Saudi Arabia’s Oil Export Strategy | OilPrice.com

Remember this strategy? Saudi has been cutting exports to the US while increase export to Asia. This exploits opaque inventories that are not reported as OECD inventory.

Not stated here, I do wonder if part of this play is to sustain consumption growth rates in Asia with lower prices. These countries just have to keep their stockpiles secret to enjoy lower prices. Conversely, would this mean that willingness to pay higher prices in OECD countries is also being exploited.

While this may seem to work in the short run, I suspect it may not be so smart in the long run. OECD countries have already demonstrated that they will cut demand at higher prices of oil. So this strategy dares OECD countries to get serious about fuel efficiency and EVs. Meanwhile, filling up Asian reserves is just pulling sales forward.

 

[jhm]

India Will Lead Global Oil Demand By 2035 | OilPrice.com

See my comments post to this article. EV reality is pouring a cold shower on the fantasy that China will be a long-term growth engine for oil demand. So BP economists avert attention to India.

They offer up a hot and steamy fantasy that transport fuels will comprise 93% of oil demand in India by 2035. Go on, tell me more.

 

[SebastianR]

I think this week will be an interesting week for the German car industry: today we receive the news that Tesla is killing the luxury class in Europe, too and later this week (on Thursday) there will be a final court decision if cities in Germany have to ban Diesel cars from driving when air quality is getting too bad. (the amount of hysteric debate about that in Germany is funny to watch).

Tesla vehicles now dominates luxury segment in Europe, outselling flagship gas-powered German cars

Germany's top court could open way to bans on diesel cars

My theory is: if diesels are banned in Germany, then there will be a much accelerated transition to electric vehicles (since the 95g/CO threshold of the EU will not be realistic). So I assume this is either accelerating or stalling the destruction of oil demand.

 

[SwTslaGrl]

"The oil industry collectively needs at least $10 trillion in fresh investments by 2040 to replace declining fields and ensure adequate supply to meet demand from the world's growing population, UAE Energy Minister Suhail bin Mohammed al-Mazroui said on Tuesday."
OPEC calls for $10 trillion in fresh oil investments by 2040 to meet demand

 

[jhm]

"The oil industry collectively needs at least $10 trillion in fresh investments by 2040 to replace declining fields and ensure adequate supply to meet demand from the world's growing population, UAE Energy Minister Suhail bin Mohammed al-Mazroui said on Tuesday."
OPEC calls for $10 trillion in fresh oil investments by 2040 to meet demand

So what if they don't?

This is an investment rate of $1.245B per day or about $12.5 per barrel produced. So it makes a big difference whether the price of oil comes in above $70 or below $60 per barrel.

 

[TheTalkingMule]

Some more details out regarding the ongoing refinery bankruptcies in Philadelphia. What a great way to turn $175M into $600M nearly risk-free.

Refiner goes belly-up after big payouts to Carlyle Group

NEW YORK (Reuters) - Throughout 2016 and 2017, a rail terminal built to accept crude oil for the largest East Coast refinery often sat idle, with few trains showing up to unload.
Although little oil flowed, plenty of money did.

Under a deal Philadelphia Energy Solutions (PES) signed in 2015, the refiner paid minimum quarterly payments of $30 million to terminal owner North Yard Logistics LP - even if little crude arrived. Much of that cash, in turn, flowed to the investors that own both PES and North Yard, led by the Carlyle Group, a global private equity firm with $178 billion in assets.

The deal in effect guaranteed lucrative payouts to Carlyle regardless of whether the refinery benefitted from the arrangement. When oil market conditions made the rail shipments unprofitable later that year, the refinery took heavy losses while its investors continued to collect large distributions for two more years.

The rail contract exemplifies the financial demands Carlyle imposed on PES in the years leading up to the refiner’s bankruptcy in January. The Carlyle-led consortium collected at least $594 million in cash distributions from PES before it collapsed, according to a Reuters review of bankruptcy filings. Carlyle paid $175 million in 2012 for its two-thirds stake in the refiner.

It'd be great if we could figure out when these assets become walking zombies. Lord knows Philadelphia refining has been for going on 10 years now.....yet we want to expand into LNG. Genius.

Also, who in the end is paying this $400M that Carlyle is netting? The vague "creditors", or does this get somehow passed on to consumers in fuel costs? They certainly owe several hundred million to the EPA that we'll never see.

 

[jhm]

Also to replace the oil industry from the transport fuel markets, we need a $1T investment in 10TWh/year battery production capacity. Anyone have a guess on how much investment is needed for mineral resources? I'm guessing well less than $1T. Plus investment in battery R&D.

So altogether maybe a $2T investment in batteries competes with a $10T investment in crude oil. The soon the global economy makes that critical investment in batteries, the less investment in crude will ever be needed. For example, an aggressive $1T investment in batteries over then next 7 years might avoid a $7T investment in crude oil. So the return to the global economy from avoided investments could be enormous. The price of oil, for instance, would be unburdened by about $10/b, which keeps global energy prices low and enhances labor productivity.

 

[mspohr]

Michigan utility promises to give up coal in order to be ‘on the right side of history’

They say they want to be "on the right side of history" but it looks like they have finally figured out that the economics of coal don't work now that it's cheaper to build and operate solar and wind than it is to keep their old coal burners running.

 

[jhm]

Michigan utility promises to give up coal in order to be ‘on the right side of history’

They say they want to be "on the right side of history" but it looks like they have finally figured out that the economics of coal don't work now that it's cheaper to build and operate solar and wind than it is to keep their old coal burners running.

I dunno. I think they need to retire them a lot sooner than 2040 to be on the right side of financial history.

 

[RobStark]

Animation: Comparing China vs. India Population Pyramids

 

[mspohr]

Animation: Comparing China vs. India Population Pyramids

Great talk on world population: Hans Rosling