Shorting Oil, Hedging Tesla

[jhm]

For our local school district these fuel savings are a bit high. We’re running route busses about 60 to 90 miles per day burning 7 to 10 gallons a day average. So average annual consumption is going to be less than 2000 gallons. On the other hand commercial electric rates are just over $0.05/kWh. We have very high demand charges but these only occur between noon and 8 pm so could be entirely avoided in this situation. Some of our shorter activity trips could also be covered while longer trips would still need to use our diesel fleet at this point.

The vehicle to grid capability could be very interesting as an additional revenue stream for a school district. These busses are parked for the vast majority of the summer when they could be helping with peak loads.

Cool. Thanks for the reality check. Blue Bird will have two battery sizes: 100kWh and 160kWh. So for some of the shorter routes the smaller pack could save money. If a bus is going 45 miles in morning and 45 in the afternoon, 100kWh with two charging cycles could be more than enough.

 

[TheTalkingMule]

EVERY school in the Philly suburbs will insist on BEV buses once they are close to mainstream. Rich white folk will jump on this faster than kale.

On another note.....I keep seeing OilPrice and others quoting "lowered global supply levels". Where? There's no visilbility into any supply but ours and our glut is yo-yoing at an average level never seen before 2015.

I hate to keep beating this dead horse, but Imports into the US are also at an all-time low. How does any of that equate to lower global supply? All I see is purposefully record low exports from Saudi Arabia to the US and record high US commercial oversupply.

 

[jhm]

EVERY school in the Philly suburbs will insist on BEV buses once they are close to mainstream. Rich white folk will jump on this faster than kale.

On another note.....I keep seeing OilPrice and others quoting "lowered global supply levels". Where? There's no visilbility into any supply but ours and our glut is yo-yoing at an average level never seen before 2015.

I hate to keep beating this dead horse, but Imports into the US are also at an all-time low. How does any of that equate to lower global supply? All I see is purposefully record low exports from Saudi Arabia to the US and record high US commercial oversupply.

The thing I think about with this import/export arrangement is that refiners may simply need to upgrade their processes so they don't need as much heavy crude, can use domestic light.

 

[ValueAnalyst]

The thing I think about with this import/export arrangement is that refiners may simply need to upgrade their processes so they don't need as much heavy crude, can use domestic light.

It’s not a “simple” process, it would take billions of dollars of investment, and the future of light oil production is uncertain.

 

[ValueAnalyst]

EVERY school in the Philly suburbs will insist on BEV buses once they are close to mainstream. Rich white folk will jump on this faster than kale.

On another note.....I keep seeing OilPrice and others quoting "lowered global supply levels". Where? There's no visilbility into any supply but ours and our glut is yo-yoing at an average level never seen before 2015.

I hate to keep beating this dead horse, but Imports into the US are also at an all-time low. How does any of that equate to lower global supply? All I see is purposefully record low exports from Saudi Arabia to the US and record high US commercial oversupply.

Global oil supply is not lower. Global oil demand is increasing.

 

[jhm]

It’s not a “simple” process, it would take billions of dollars of investment, and the future of light oil production is uncertain.

It takes billions of dollars to add export capacity too. Also the value of US light crude in the export market is uncertain as well. So if US refiners are able to process more domestic crude, it avoids investment, costs and risks associated with becoming a big crude exporter.

Exxon seems to think it is a good idea to integrate domestic production with domestic refining, and plans to put $9B into 6 refineries. Top Exxon executive confirms Gulf Coast oil-refining expansion

 

[TheTalkingMule]

Again, one of the only transparent oil markets in the world(ours) is showing a 3.3M barrel build last week and has increased 5 of the last 7 weeks.

Where is this reliable metric showing me lower global supply?

 

[ValueAnalyst]

It takes billions of dollars to add export capacity too. Also the value of US light crude in the export market is uncertain as well. So if US refiners are able to process more domestic crude, it avoids investment, costs and risks associated with becoming a big crude exporter.

Exxon seems to think it is a good idea to integrate domestic production with domestic refining, and plans to put $9B into 6 refineries. Top Exxon executive confirms Gulf Coast oil-refining expansion

Exactly. All of this will take years and billions, and market participants simply are not that forward looking.

 

[jhm]

Exactly. All of this will take years and billions, and market participants simply are not that forward looking.

Ok, it seems we are talking from different time perspectives. You seem focused on the next few months to a year or two, while I tend to look out over the next five years or so. Not a value judgment, just an observation.

The US is likely to become net oil exporter (crude and refined products) in about 3 to 5 years. In that timeframe, I believe it makes sense for Exxon to increase its domestic light crude refining capacity. US light crude producers definitely do not want to be in position where heavy crude commands a high price while light crude is cheap on the global market. I think this has been Saudi Arabia's basic strategy to drive up the price of heavy crude knowing that US refiners needed it, in spite of the abundance of light, sweet domestic crude. Whatever the spread between heavy and light on the global market if the US can refine it into gasoline, diesel and other products, it can export those at market prices. So the US need enough light crude refining capacity to keep the heavy to light spread from getting too wide. And it is worth $Billions to keep domestic light crude from becoming severely underpriced relative to heavy crude. So I think this is the game that Exxon is playing.

 

[SwTslaGrl]

New Zealand halts new offshore oil and gas exploration
"(We are) taking an important step to address climate change and create a clean, green and sustainable future for New Zealand," Prime Minister Jacinda Ardern said. "Industry group Petroleum Exploration and Production NZ (PEPANZ) said it had been blindsided by the announcement and had not been consulted by the government."
New Zealand halts new offshore oil and gas exploration

 

[ValueAnalyst]

New Zealand halts new offshore oil and gas exploration
"(We are) taking an important step to address climate change and create a clean, green and sustainable future for New Zealand," Prime Minister Jacinda Ardern said. "Industry group Petroleum Exploration and Production NZ (PEPANZ) said it had been blindsided by the announcement and had not been consulted by the government."
New Zealand halts new offshore oil and gas exploration

Thank you. We'll see if this spreads to other countries where oil production comprises a larger component of economy.

 

[jhm]

New Zealand halts new offshore oil and gas exploration
"(We are) taking an important step to address climate change and create a clean, green and sustainable future for New Zealand," Prime Minister Jacinda Ardern said. "Industry group Petroleum Exploration and Production NZ (PEPANZ) said it had been blindsided by the announcement and had not been consulted by the government."
New Zealand halts new offshore oil and gas exploration

Thanks.

Ardern said existing drilling and exploration permits would not be affected, meaning no existing jobs would be lost.

She said there would also be limited new on-shore permits around the North Island's Taranaki region, where most of New Zealand industry is concentrated.

"We're striking the right balance for New Zealand -- we're protecting existing industry and protecting future generations from climate change," she said.

My take on this is that it only places limits on adding to New Zealand's proven oil reserves. Existing production and exploration permits are not impacted. Globally, proven oil reserves are about 50% greater that what the world ever needs to consume if we are to have any hope of limiting climate change. Thus, it is quite prudent not to be investing the expansion of proven oil reserves. So I think New Zealand is active very responsibly here, and even protecting the industry and its workers from adverse economic problems many years out. That is, the industry needs to wind down in a responsible and orderly way over the next several decades. That is how you protect workers from abrupt job loses.

It should also be clear that this has no immediate impact on oil supply. Actually, it has practically no impact on the adequacy of oil supply ever. It only mitigates against future asset stranding.

 

[justvisiting]

Again, one of the only transparent oil markets in the world(ours) is showing a 3.3M barrel build last week and has increased 5 of the last 7 weeks.

Where is this reliable metric showing me lower global supply?

Who´s talking about lower global supply? Demand is growing faster than supply, and there have been no investments beside shale to meet that demand, which will drive prices higher without supply actually, in absolute numbers, declining

And yes, storage build is the norm in the first quarter. Still we are below the 5-year average in storages now, and dthe draws are only starting..

In the meantime, oil is going higher and higher...

 

[ValueAnalyst]

All pieces are now in place for $100 Brent this year.

Tesla can increase Model 3 ASP to $60,000, which I believe is the key to profitability in 3Q18.

 

[replicant]

Should I put that here?

Above $40, shale producers will ramp up production that they've been choking or even completing wells. So this combined with huge inventory and continued oversupply leads me to think there is no moderately sustainable price above $40.

Oil at $50/b or higher might simply never work for economies less advanced than India. And yet the marginal supply of oil, oil that is costly to find and produce, may well require a price above $50/b to motivate investment. So the only way, poorer contries can afford oil is if it is sold below $50. So either the market is over supplied and oil sells below cost or consumption in the developed world must come down to such a degree that $50 marginal oil is not needed.

While developed countries may support oil at $80/b with modest economic growth, why should we believe that this is also true of developing countries? Berman expects that demand destruction at prices above $60/b. To put a finer point on it, let's focus this expectation on non-OECD countries. Demand destruction for oil within non-OECD may well begin at prices below $60/b.

It seems producers who are drilling at $50 are basically betting that oil will go back to $80, and they get to cash in. But if oil stays in range of $50, they go bankrupt. So shorting companies that go bankrupt is a much better return than shorting oil.

The Saudi family is not in a position to weather this storm much further if they expect to maintain power. Burning through $120+B every year means the end of rule within 3 or 4 years if they're lucky. What are the odds of oil being over $50 a year from now, 50/50 perhaps? Not good.

This is probably part of what's preventing oil from breaking above $60. Once consumers figure out that pure electrics are better than hybrids and once upfront purchase price for long-range electrics reaches price parity with hybrids -- which is basically happening as we speak -- we should expect that price cap to drop down to $40/bbl.

Regarding the current oil price, I think the price could plunge soon. Most of the optimism is based on the OPEC production cut and high compliance rates. But I sounds like this mostly comes down to the Saudis. I rather suspect they are motivated to fetch a solid price for Aramco at IPO. Regardless, this situation feels thin.

The other thing is that the crude inventory has been growing again. US crude stocks are 140 million barrels over the five-year average for this time of year. It could hit an ATH very soon.

Meanwhile the price of oil has been stuck. It just can't get past $55. So I would not be surprised if oil began to fall substantially in the next few weeks to months.

It's crazy to me that the oil market participants have a shared expectation of ~$55/bbl oil a year or 2 out. If I were an oil producer, I'd be selling every barrel of future delivery oil I could find a buyer for at that price (further exacerbating oil supply) - assuming I make money at that price of course.

Brent looks like it is going down. Back end of futures curve is down $0.34 while front end is down $0.90. It was too flat yesterday, and it is trying to restore contango by dropping front end faster than back end. If you look out at something like Dec 2021, you find its been declining steadily for the last three months. The front end of Brent has struggled to stay above $55 even as the back end has eroded.

As long as shale producers are happy to keep drilling, the back end will keep falling. And eventually the front end will buckle under. We may be seeing the beginning of that now.

I don't see what the OPEC deal attempts to accomplish at this point. They are simply ceding market share to the US shale producers. $60 Brent is too much to hope for and not worth the wait.

And we have news that some US shale oil is profitable at $20/barrel which means that they will keep pumping + the news that more of Iran's oil is coming online, that China's demand flattens... This will be interesting in the short-term. But will it be enough to achieve perma-glut status already soon?

Rystad revises Aramco IPO valuation after the Saudis reduce tax rate from 85% to 50%. That changes the valuation from $400B to $1400B. But that's not what interests me.

What I find curious is the assumption of oil at $75/b in 2018 and beyond.

I added the bold. While the futures curve put 2018 oil at $50/b, Rystad wants to use $75/b. So revenue may be inflated by more than 50% on the basis of this assumption. The rationalization is that such an assumption is also implied in the market value of the major global oil companies. Hmm...

So does this suggest that oil majors may likewise have revenue overstated by 50%. This is particularly troubling because overstating revenue does not likewise overstate costs and SG&A. Moreover, some oil reserves that are economic at $75/b may not be so at $50/b. So the overstatement could be much bigger than 50%, and the whole enterprise could be highly unprofitable at lower oil prices.

So what we learn here is that the market values oil majors under the assumption the oil prices will soon reach $75/b and remain high for many years. And all this is in contradiction to the futures markets that price oil at $49 to $55 for the next 9 years.

I see no angle outside of WWIII that puts oil back where it once was, the factors pushing against that(now from all sides) seem too impenetrable to have any kind of sustained run above $70 or $80.

Hedging in this low price environment probably feels wonderful to airline executives and other big players who are flush with cash and can preserve their existence for what must feel like a cheap price. But at what point does that slow by a tangible amount? Is there potential for it to fall off a cliff? Eventually human nature will force these people to simply stop hedging like it's 2006 and settle in for the long haul with low energy costs.

Is that the dynamic currently keeping brent above $40? Are we gorging on cheap hedges to an illogical extent? What does that unwinding look like?

Perhaps I'm over-estimating the effect of hedging, but prices right now should be at $40 right?

 

[TheTalkingMule]

Who´s talking about lower global supply? Demand is growing faster than supply, and there have been no investments beside shale to meet that demand, which will drive prices higher without supply actually, in absolute numbers, declining

And yes, storage build is the norm in the first quarter. Still we are below the 5-year average in storages now, and dthe draws are only starting..

In the meantime, oil is going higher and higher...

OPEC+Russia is desperately limiting production thru at least 2018. US commercial supply stands at 428M barrels, it's never been above 400M prior to 2015.

All I see is the price going higher, not any rational market-based reason for it.

 

[dc_h]

OPEC+Russia is desperately limiting production thru at least 2018. US commercial supply stands at 428M barrels, it's never been above 400M prior to 2015.

All I see is the price going higher, not any rational market-based reason for it.

Isn’t part of last years budget deal sale of some of the strategic reserve?
Silly they didn’t sell more when it was $140 a barrel and add back when it was 30. Congress is better at market timing their own portfolio.

 

[justvisiting]

OPEC+Russia is desperately limiting production thru at least 2018. US commercial supply stands at 428M barrels, it's never been above 400M prior to 2015.

All I see is the price going higher, not any rational market-based reason for it.

the last sentence sounds like you are talking about tesla.

but jokes aside, if you want to better understand storage dynamics, you can for example follow HFIR on seeking alpha. he presents the bull case for oil much better than i can/am willing to on my own time. Even if you don´t agree, it would be useful to broaden your horizon.

And OPEC and Russia are not "desperately" limiting production. They might very well be at or near their maximum capacity, the whole "we can massively increase production overnight" is more hollow threat than reality.

 

[ValueAnalyst]

the last sentence sounds like you are talking about tesla.

but jokes aside, if you want to better understand storage dynamics, you can for example follow HFIR on seeking alpha. he presents the bull case for oil much better than i can/am willing to on my own time. Even if you don´t agree, it would be useful to broaden your horizon.

And OPEC and Russia are not "desperately" limiting production. They might very well be at or near their maximum capacity, the whole "we can massively increase production overnight" is more hollow threat than reality.

Are you short Tesla and long oil? I frankly think Tesla should be added to XLE.

 

[justvisiting]

Are you short Tesla and long oil? I frankly think Tesla should be added to XLE.

Yes, but i see it as two individual investments.
I dont think those two investments have much correlation tbh. I think the whole idea of short oil as a hedge of long tesla is absolutely wrong, on a conceptual level. But thats just my opinion

And for Tesla as a part of XLE - dont think so. 90% of its revenue is manufacturing of cars, that makes it a car company (albeit a highly unusual one in terms of vertical integration etc.)