Shorting Oil, Hedging Tesla

[jhm]

Here is a nice view of what is going on with the price of gasoline in relation to diesel and jet. Notice that Diesel and jet are likely to lead increases in gasoline, while gasoline tends to lead a decline in the other fuels. The price collapses in 2009 and 2015 were lead be gasoline, while increases in 2008, 2011and 2018 were lead by diesel.

In this historical context, the decline of gasoline in the last 45 days looks worrisome. From 10/1 to 11/13 (most recent data in this source), gasoline has fallen 31% while diesel is down just 17%. How far does this go?

 

[jhm]

Electrons On The High Seas -- The Zero Emissions Maritime Report | CleanTechnica

Nice summary of electric marine vessels.

 

[jhm]

Swedish Mining Equipment Manufacturer Will Be 100% Electric In 5 Years | CleanTechnica
We've been following this topic too. It just make sense that that electric underground mining equipment saves on ventilation costs, which can be 40% of the total cost of mining. So there is not just a diesel fuel savings to be had here.

As miners electrify, they will also consume more renewable power too. Before long, the idea that EVs have all these imbedded carbon emissions owning to using fossil fuels in mining operations will be a thing of the past.

 

[dc_h]

Any update on what China is doing with their strategic reserve? They had been adding the last few years, is that over, increased reduced? They’ve also been giving Venezuela a lifeline, if the reserve is full soon, the impact would be like adding a Permian.

 

[mspohr]

Peak Oil & Drastic Oil Shortages Imminent, Says IEA | CleanTechnica

IEA is predicting peak oil before 2020. Very interesting.
(They have been absurdly wrong about renewables but they should know the oil market.)

 

[TheTalkingMule]

Brent continues it's slide today. From $84 to $61 in a month and a half, insane.

 

[SebastianR]

Brent continues it's slide today. From $84 to $61 in a month and a half, insane.

Insane indeed! And the bloodbath continues - I think that WTI might collapse into the 40s today...

 

[neroden]

My Mom has a bunch of Exxon that my Dad bought decades ago. I've been trying to get her to sell it but taxes...and lethargy. She may be giving it to grandkids soon and they can then sell tax free.

Rrrgh. That must be frustrating. It's not worth potentially losing a lot of money on a poor investment just to avoid the 15% or 20% capital gains + state income taxes. (In the US, giving it to grandkids wouldn't avoid that, they have to sell it with the same "carryover" tax basis she had -- if they're in a lower tax bracket that would cut the taxes some, though.)

 

[neroden]

The Oil Industry Is Facing A



We hashed this out here first. Now it is becoming clear that capital discipline is the way to go. FCF is king. I suspect that in the coming downturn, players will strong capital discipline will be able to buy assets in a fire sale from those that overextended into new investments. We'll see in about a year.

Yes, as predicted. However, I'm going to go out on a limb: I think it's getting a little late for the "capital discipline" concept to help oil companies. They should have been doing that in *2008*. Take a look at Anadarko, which has been robustly advertising its new capital discipline. The stock market savaged it along with the rest of the sector. Pump/sell/dividend works for a while, but if the final oil price crash is coming in less than ten years, a P/E ratio of 18 starts to look rather rich, unless you are the lowest-cost producer.

 

[neroden]

Market Statistics | PSAC

View attachment 354449

at 75 cents usd to 1 canadian dollar that makes WCS to be sold at $17.7 usd

So it looks like transportation costs are killing the value of the tar sands. Why would you even bother to make "synthetic crude" to sell it for US$27/bbl?

 

[neroden]

View attachment 354620

Here is a nice view of what is going on with the price of gasoline in relation to diesel and jet. Notice that Diesel and jet are likely to lead increases in gasoline, while gasoline tends to lead a decline in the other fuels. The price collapses in 2009 and 2015 were lead be gasoline, while increases in 2008, 2011and 2018 were lead by diesel.

In this historical context, the decline of gasoline in the last 45 days looks worrisome. From 10/1 to 11/13 (most recent data in this source), gasoline has fallen 31% while diesel is down just 17%. How far does this go?

Dunno, but at $1.50 gasoline, the fuel cost savings from going electric for the average driver is down into the $1000 range. Could slow down the switchover to EVs temporarily, potentially. It'll hurt oil company profits a lot more, though -- their costs aren't going down significantly.

The economics for electric buses, semis or anything high-miles-per-year are still substantial, though. And the other benefits of electric drive seem to be worth a premium to most buyers (though I still couldn't tell you how much of a premium).

 

[jhm]

Peak Oil & Drastic Oil Shortages Imminent, Says IEA | CleanTechnica

IEA is predicting peak oil before 2020. Very interesting.
(They have been absurdly wrong about renewables but they should know the oil market.)

It took me a little while to appreciate what this chart is presenting. Prominent are the declining supply curves. These represent product if all new investment were to cease. So economically this is the fastest decline rate that the oil industry could sustain without having to cap off production.

Then there are two different demand scenario: New Policies Scenario and Sustainable Development Scenario. The NPS rises to a plateau, and the SDS peaks around 2021. What is striking here is that both of these scenarios start out growing at a the same rate. This rate is higher than recent history. If you just straight line the the most recent years out, you get a projection that undercuts both scenarios. Modelers frequently make a distinction between short term and long term forecasts and may different methodologies.

The peak of NPS depends on how much demand grows over the next 5 to 10 years. So if IEA is wrong about the short term forecast, both scenarios could disappoint the oil industry.

I also think there is a problem with the decline rate analysis. The problem is that this actually implies massive asset stranding. There is substantial capital invested in the ability to keep drilling at the current rate. Think about all the oil rigs currently drilling. If all this activity were to decrease at a rate faster than depreciation, than these E&P assets would suffer impairment. We already saw that happen in the last oil glut. Expensive oil drilling ships were mothballed and have yet to come back into service. As investment rates fall, E&P companies face a financial crisis and may be induced to offer their services at very low cost. This changes the economics such that new wells will continue to come online at costs below what is sustainable. So I find it highly unlikely that the industry could follow the natural decline rate without massive capital impairment. This could push oil price well below sustainable for quite a long time. A much deeper analysis is needed to understand how quickly oil production could fall without sinking the average price below say $60.

So the chart as it stands paints a picture of how even in sustainable development scenario some 6 mbpd of drilling per year is needed. But how quickly can this 6mbpd per annual drilling fall off without causing economic collapse for the oil industry?

 

[jhm]

Yes, as predicted. However, I'm going to go out on a limb: I think it's getting a little late for the "capital discipline" concept to help oil companies. They should have been doing that in *2008*. Take a look at Anadarko, which has been robustly advertising its new capital discipline. The stock market savaged it along with the rest of the sector. Pump/sell/dividend works for a while, but if the final oil price crash is coming in less than ten years, a P/E ratio of 18 starts to look rather rich, unless you are the lowest-cost producer.

Yup, at some point capital discipline means divesting before suffering asset impairment.

 

[jhm]

Dunno, but at $1.50 gasoline, the fuel cost savings from going electric for the average driver is down into the $1000 range. Could slow down the switchover to EVs temporarily, potentially. It'll hurt oil company profits a lot more, though -- their costs aren't going down significantly.

The economics for electric buses, semis or anything high-miles-per-year are still substantial, though. And the other benefits of electric drive seem to be worth a premium to most buyers (though I still couldn't tell you how much of a premium).

One way for the diesel to gasoline price spread to narrow is for more medium to light duty vehicles to switch from diesel to gasoline. This may be a reach for semis, but a commercial van or truck can easily be gasoline powered. So I'm not too worried about a low gasoline price slowing up EVs so long as the price of diesel is high enough to motivate diesel to gasoline switching.

But the dislocation of demand is still an economic problem for refiners. They will have to sustain a price spread deep enough to motivate vehicle buyers to switch fuels. When heavy electrics hit the market in volume and crush diesel demand, the spread could reverse.

 

[neroden]

This is gonna be *interesting*. The big refiners are retooling to produce more diesel thanks to the new IMO rules meaning ships have to burn diesel rather than refinery garbage starting in 2020. (Of course, ships are going to demand more diesel starting in 2020, too.) This will reduce refinery margins (they have to pay or dispose of all the garbage which was previously used in ships). The increase in diesel production isn't going to make diesel cheap enough to prevent trucking companies from adopting Semis starting in 2020, though. If the gasoline glut also leads to diesel-to-gasoline switching now -- we could see demand for diesel falling quite aggressively starting in 2021.

 

[renim]

So it looks like transportation costs are killing the value of the tar sands. Why would you even bother to make "synthetic crude" to sell it for US$27/bbl?

To be sure, it was $17 not $27
Why i posted this, there were news articles when the price went down to $13.46
Heavy Canadian crude falls to record low

 

[jhm]

Here's a little chart on US stocks of crude, gasoline, diesel, and jet. We see the familiar rise of crude stock from 2014 to 2017. Notice that diesel stocks went through a similar rise from 2014 to 2017 with fall down to present. Gasoline and jet do not show this pattern. I suspect that diesel is easier to stockpile for multiyear balancing. Gasoline clearly fluctuates to deal with seasonal demand. So in the current situation gasoline stocks are a bit elevated, while diesel is trending low. The high ratio for gasoline to diesel stocks would be consistent with lower gasoline prices relative to diesel.

Also worrying is that crude inventory may also be on the rise.

 

[jhm]

To be sure, it was $17 not $27
Why i posted this, there were news articles when the price went down to $13.46
Heavy Canadian crude falls to record low

Wow, so the price was so low that producers shut in 140kbpd and asking the government to mandate across the board production cuts. So the price must be so low that producers are at a marginal loss to ship the oil to market.

 

[ZachF]

How much money does the Saudi royal family have left? Is there a running estimate out there?

$60 or lower Brent for all of 2019 means what....a $100B budget deficit not including active military actions?

2 years of sub $60 oil was enough to drop Saudi Arabia's forex reserves from $750 billion to <$500 billion.

(Chart is in Saudi Riyals, which is tied to the dollar at 3.75 = 1)

Another prolonged bout of <$60 oil would probably force SA to de-peg their currency and undergo austerity measures.

It's really hard to believe just how dependent SA is on oil.

 

[Off Shore]

2 years of sub $60 oil was enough to drop Saudi Arabia's forex reserves from $750 billion to <$500 billion.

(Chart is in Saudi Riyals, which is tied to the dollar at 3.75 = 1)

Another prolonged bout of <$60 oil would probably force SA to de-peg their currency and undergo austerity measures.

It's really hard to believe just how dependent SA is on oil.

Maybe also explains why they're leaning so hard on whatever leverage they have over Trump.