Shorting Oil, Hedging Tesla

[Oil4AsphaultOnly]

This is a nice view. The field is definitely deepening, becoming less concentrated. Look at what has happened to the market share for the top producer each year. It has fall from 23%, 11% to 9% these three years. The top five collectively held market share of 71%, 46% and 37% in those three. So it will be come increasingly difficult for any EV maker to hold on to a 10% market share. That would actually signal contraction in the field.

It is also important to see that the race is fairly tight among the front runners. BYD and Tesla were separated by about 11k in 2015, but this narrowed to 6k in 2017. BYD grew by 77%, while Tesla grew by 104% in 2017 over 2015. So Tesla is definitely keeping the heat on. But props goes to BAIC for growing five-fold in this two year timeframe.

The frontrunners definitely need to grow at a quick pace if they want remain in the top spots. Come 2019 Tesla could be producing 500k to 600k. That would be 5 to 6 times the volume in 2019. Can BYD, BAIC, and BMW keep with that pace? I hope so. Who else will jump into the top five. If the top five frontrunners are taking collectively 2.3 to 2.8 million in 2019, this will exert enormous pressure on all automakers to get into the EV race. Even though two of these are primarily selling in China, this will still challenge all major automakers to compete with EVs in the very important growth market. Any automaker that is not growing in China is probably not growing globally. So building a competitive EV in China is becoming an essential requirement of growth anywhere.

The top five EV makers collectively held 37% share of the plug-in market in 2017. What will this share be in 2019? Likely it will continue to shirk. Let's suppose the top five (whoever they may be) will hold 30% market share. So with this group producing 2.3 to 2.8 million (so as to keep pace with Tesla), this implies a market size of 7.7 to 9.3 million in 2019. In this kind of competitive scenario, Tesla's market shared drops from 8% to about 6.5%. While that may look bad for Tesla individually, it is actually a huge win for EVs as a market. This would push EVs to nearly 10% share of the whole auto market in 2019. This is much faster EV penetration than anyone in the oil industry would like to believe is remotely possible.

Yet that scenario may in reality be too aggressive on EV growth in such a short time. Any alternative scenario where Tesla grows nearly to 600k in 2019 while EV market is less 6 million implies that Tesla is growing market share and taking the largest share of the market. Some Tesla investors might view this as a plus for Tesla, but a more dynamic EV market could be very good for the stock too.

So the basic point here is that so long as Tesla is growing a fast pace it really does not matter if it is losing market share. What matters for the auto and oil industries is that competition within the EV space is strong. If this is a tight race among the top five EV makers, this spells rapid transformation for the rest of the auto industry and for the oil industry. Fierce competition is a force multiplier of the impact that Tesla is able to achieve.

Thank you for spelling it all out! Basically, the thesis for shorting oil is still very much intact (after this summer's spike of course), because the industry as a whole is changing. Tesla might not have the manufacturing might to replace all the oil demand, but focusing on Tesla's capabilities is missing the forest for the trees.

 

[jhm]

I expect rising oil prices to increase demand for used Tesla's:

ValueAnalyst on Twitter

I think the used car market is a great place to under stand the impact of fuel prices on car valuations. As cars become increasingly depreciated, their value tends to be dominated by operating costs. So this is where you can see some real price sensitivity to fuel prices play out. As fuel prices climb, used gasmobiles will lose value faster than used EVs. This, in turn, will soften demand for new gasmobiles and harden demand for new EVs.

So much attention has been put on when EVs will achieve sticker price parity with ICE, which BNEF and others tend to see happening around 2025. The problem with this view is that it ignores the role of the used car market in anchoring the value of new cars. Consumers will be willing to pay a premium for good EVs over ICE if they believe that those EVs will retain value much better than ICE will. I think this advantage can play out years ahead of achieving sticker price parity on new cars.

A particular advantage with accrue to Tesla and other EV makers that have a lot of older vehicles on the road. In 2020, an 8-yo Model S in good condition will help firm up the price for a 4-yo Model S, which in turn will firm up the price for 2-yo Model S and demand for new Model S. If some competitor comes out with a new EV model in 2020, it will not have that chain of used car prices to back up the value proposition. So a purchase of a Model S in 2020 could be a very conservative choice while that new model EV will have to appeal to less conservative buyers. I think this will prove to be a durable advantage for Tesla. In 2028, how many EV models will have 10-15 year old vehicles still on the road in good working order? This is why Tesla may never need to lower the price on new Model S or X. They keep gaining in value in the estimation of conservative car buyers. Late adopters will love them!

 

[TheTalkingMule]

Think also about the state of electricity supply and pricing in say.....2022. Solar will be overwhelming grids and one of the best routes municipalities can take to absorb(rather than waste) excess is to offer it for free. As a keen watcher of Philadelphia and Pennsylvania energy policy/politics, I could easily see mid-day charging being somehow delivered for free to under-served neighborhoods.

Zero marginal cost new EVs priced at $20k will suddenly look like a bargain(if you can get the loan). $350+insurance for total cost of ownership per month, an absolute steal if you commute a decent distance.

 

[TheTalkingMule]

EIA US commercial oil supply since 2000 updated through last week....

 

[jhm]

EIA US commercial oil supply since 2000 updated through last week....

View attachment 295467

One thing to note in this chart is that getting US inventory down to a five year average is not that great of a feat. The inventory has been well above historic trends over the last four years. So the five-year average is way too high! An inventory level around 360 mb would get us back to the historic trend.

 

[jhm]

Thank you for spelling it all out! Basically, the thesis for shorting oil is still very much intact (after this summer's spike of course), because the industry as a whole is changing. Tesla might not have the manufacturing might to replace all the oil demand, but focusing on Tesla's capabilities is missing the forest for the trees.

The force multiplier idea is pretty cool. A while back I used to make the argument that the auto industry would not let Tesla catch more than 20% of the EV market. On that basis, I was able to reason that Tesla could get to about 5million/year by about 2025, and at 20% of the market, this implies 25 million EVs sold in 2025. I still believe that 25M/yr is enough private passenger EVs to assure the oil consumption could not grow. So here I envisioned a mere 5X force multiplier.

But China in particular has come on in a big way. So now the same argument could be based on Tesla being competitively limited to a 10% market share. This is a 10X force multiplier. Thus, Tesla only needs to get to 2.5M/yr to force oil consumption into decline. Obviously, this could come a few years earlier.

Suppose Tesla reaches 500k/yr by 2019 and continues to grow 50%/y. Then 4 years later, Tesla hits 2.5M/yr in 2023. And at just 10% market share, EVs reach 25M/yr as early as 2023.

What's interesting about this argument is that it flip the old Tesla Bear argument on its head. Bears used to say that big auto would never let Tesla get very far. They would step in an out compete Tesla. This Tesla Killer argument essentially means that competition will arise to limit Tesla's share of the EV market. Ok, let's concede that. Now what does that imply for the transition to EV. It means that the rest of the industry as a whole must at least match the pace of Tesla. Perfect, this puts Tesla in the seat of the pace car.

Conversely, this argument flips the objection of oil industry on its head too. That objection is that Tesla and by extension all EVs is too small in impact to make much of a difference in oil demand for quite a long time. Very well, lets suppose that Tesla reaches 2.5M/yr by 2023 while the rest of the auto industry holds back such that only 5M EV are built in 2023. This implies that Tesla is walking away with 50% share of the EV market. That may be jolly for the oil industry, but it is devastating for an auto industry that is utterly unprepared to transition to EVs. So long at Tesla keeps march on, either the auto industry or the oil industry will suffer massive disruption. Tesla strikes a wedge between these intertwined industries. If big auto is going to survive this transition, it necessarily means oil demand will fall sooner than the oil industry is expecting.

The irony of this Tesla wedge is that the one thing that would slow the transition for both the auto and oil industries would be lower fuel prices. If oil goes to $100 and ICE sales slow, this could be very bad for both industries.

 

[RobStark]

Global EV sales in 2017 were 1.2M

Estimates for 2018 global EV sales range from 1.6M to 2.0M.

Tesla will make ~100k Gen II vehicles and 100k-180k Model 3 vehicles.

That is at least 10% global market share for Tesla.

Here is a projection that comes in at the low end.

Global Electric Vehicle Market Outlook, 2018

 

[mspohr]

Dieselgate leaves UK’s car industry in crisis
Dieselgate leaves UK’s car industry in crisis

More on the decline of diesel. The UK manufacturers seem to be particularly vulnerable.
UK sales down by a third.
The source added: “It’s psychology. Nothing is going to happen to diesel in the near future, but there’s now a huge issue with resale value. Who will want to buy your diesel car when you want to sell it in five years’ time? That is the biggest problem.”

 

[renim]

about 10 years ago when Shai Agassi was saying that at least 1 country will go full EV (for new sales) by 2020, and the (paraphrased) reason given was.

when financiers can now longer have surety of residual, they will no longer finance the new combustion vehicle.

his predictions may not have been perfect, but they were generally prescient, in Europe, we will see that affect diesel engine vehicles first.

(my take, for Europe), the swap from diesel to plug in will be rapid and painful, but the swap from petrol to electric will be a lot gentler)

 

[jhm]

about 10 years ago when Shai Agassi was saying that at least 1 country will go full EV (for new sales) by 2020, and the (paraphrased) reason given was.

when financiers can now longer have surety of residual, they will no longer finance the new combustion vehicle.

his predictions may not have been perfect, but they were generally prescient, in Europe, we will see that affect diesel engine vehicles first.

(my take, for Europe), the swap from diesel to plug in will be rapid and painful, but the swap from petrol to electric will be a lot gentler)

One of the easiest things for a government to do is create regulatory uncertainty, and regulatory uncertainty can quash demand and financing. So a government need not actually ban diesel or gas mobiles when just the threat that the government may do so can be enough to undermine the long-term value of these assets.

 

[ValueAnalyst]

Brent $75. Still not the time to short. I’ll tell you when.

 

[Cobos]

One of the easiest things for a government to do is create regulatory uncertainty, and regulatory uncertainty can quash demand and financing. So a government need not actually ban diesel or gas mobiles when just the threat that the government may do so can be enough to undermine the long-term value of these assets.

When Oslo decided to ban Diesel cars on the very heaviest polluting days of winter a few years back it did a lot to the psycology of buying diesel cars around Oslo. And realistically with this system you are talking about 0-6 days of bans every year. So a slight disadvantage but really not something that matters that much if you are cynical. But as you say the uncertainty did a lot more than the actual 2 days they banned it two winters ago.

Cobos

 

[TheTalkingMule]

Brent $75. Still not the time to short. I’ll tell you when.

Let us know is TSLA ever dips below $335 again.

 

[TheTalkingMule]

EV bus impact hitting the mainstream.

Electric Buses Are Hurting the Oil Industry

 

[jhm]

EV bus impact hitting the mainstream.

Electric Buses Are Hurting the Oil Industry

Awesome!!! I'm so glad this is finally getting into print. I've been telling everyone that commercial EVs have already been displacing 4 or 5 times as much fuel as private EVs, but now we see an independent analysis in print confirming this.

This article should go a long way bursting the myth that EVs are just small cars that are too few to impact oil.

Peak diesel by 2021!

 

[jhm]

In a day or two OilPrice.com will have to do a rehash on this articles. I'm looking forward to how they spin it. It will depend on the writer, I suppose.

The wheels on the bus go round and round.

 

[jhm]

Electric Buses Are Eroding Oil Demand | OilPrice.com

So this rehash of the Bloomberg EV bus story came out yesterday on OilPrice.com. I was wondering if we'd see some interesting spin, but this article is basically, meh. Most of the points are pretty straightforward. If there is any spin here, it is to frame EV buses as a regulatory phenomena.

Perhaps the effort is to downplay, so as to avoid the more disturbing implications of the story.

Even with government incentives in place, EV buses have ramped up really damn fast. China is working hard to export EV buses.

The fuel displacement impact of EV has been seriously underestimated, ignoring buses and other commercial vehicles.

Even 300 kb/d of cumulative demand displacement is likely an underestimate, as commercial vehicles, excluding buses in China, are not surveyed.

But BNEF is now tracking this cumulative impact and will likely move to close reporting gaps. This is the chart that will measure the end of a growing oil market.

These point to a needed revision in how the likes of BP, IEA, and OPEC estimate demand erosion stemming from EVs. The first step is that the industry needs accurate and complete historical data on the size, composition and use of all EVs. BNEF is starting to do this, but all serious energy analysis shops need to do likewise or at least source credible data. The second step is simply to formulate reasonable scenarios for the continued expansion of energy displacement by EVs. These scenarios need to be anchored to historical trends. If you look at the growth rate in fuel demand displacement from 2015 to 2017, you get a historical average rate of 78%/y. Even the rate from 2016 to 2017 is 49%, inspite of the fact that electric buses had more than saturated the municipal bus market in 2016. So I view this as a momentary pause as foreign markets get developed and new heavy EV products enter markets (not fully counted here). So growth rates in range of 50%/y are quite sustainable for many years. At this nominal growth rate of 50%/y, cumulative EV fuel displacement reaches 5.1 mb/d by 2025, up 1.7 mb/d over prior year. Under this simple scenario, demand for oil is likely to fall in 2025 and with greater certainty and severity will continue to fall thereafter. This puts peak oil in range of 2023 to 2025.

Right now to do this peak analysis requires making assumption out over the next 8 years or so. But as BNEF keeps updating this chart year after year, the conclusions will be inescapeabl. We will get closer and closer to the peak, where short term assumptions dominate.

For the time being, we can do a simple sensitivity analysis.

• Assuming 75%/y, EV increment reaches 1.21 mb/d in 2022 and 2.11 mb/d in 2023, so oil likely peak by 2023
  
• Assuming 60%/y, EV increment reaches 1.18 mb/d in 2023 and 1.89 mb/d in 2024, so oil likely peak by 2024
• Assuming 50%/y EV increment in 2024 1.14 mb/d and 2025 is 1.71 mb/d, so oil likely peaks by 2025.
• Assuming 40%/y, EV increment in 2025 is 0.90 mb/d and in 2026 1.26 mb/d, so oil likely peaks by 2026.
• Assuming 30%/y, EV increment reaches 0.7 mb/d, 0.95 mb/d and 1.24 mb/d in years 2027 thru 2029. So oil likely peaks by 2029.
• Assuming 25%/y, EV increment reaches 0.70 mb/y 2030 and 1.09 mb/d in 2032, so oil likely peaks by 2032.

So we can all debate which rate will prevail, but it is quite clear that if EV fuel displacement grows faster than 30%/y, then oil peaks before 2030. At recent rates of growth, a peak before 2025 should be expected.

So this is no great departure from the scenarios we've contemplated here before. It actually confirms that we were on the right track. The difference is that now we have some published displacement numbers to anchor all this on.

 

[ValueAnalyst]

BP confesses ‘mistake’ in forecasting renewable energy growth

 

[Oil4AsphaultOnly]

BP confesses ‘mistake’ in forecasting renewable energy growth

"The pace at which India – and China in particular – have developed solar power came as a surprise to BP analysts"

woo-hoo!!

Just gonna rib on you while I have the chance: Shorting Oil, Hedging Tesla

"EV/Solar won’t significantly affect demand until 2025+ and shorts won’t survive until 2020."

It t'ain't 2025 and the shorts ain't dead yet, but we seems to be on the cusp of something!

 

[ValueAnalyst]

"The pace at which India – and China in particular – have developed solar power came as a surprise to BP analysts"

woo-hoo!!

Just gonna rib on you while I have the chance: Shorting Oil, Hedging Tesla

"EV/Solar won’t significantly affect demand until 2025+ and shorts won’t survive until 2020."

It t'ain't 2025 and the shorts ain't dead yet, but we seems to be on the cusp of something!

Hey hey hey slow down cowboy BP admitted they were wrong; not I.

In fact, Brent crude oil is up nearly 20% since my post, and likely headed much higher: $100+ this summer, maybe even higher.