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Shorting Oil, Hedging Tesla

Discussion in 'TSLA Investor Discussions' started by jhm, Mar 15, 2016.

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  1. Doggydogworld

    Doggydogworld Member

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    China improved their GDP/oil efficiency about 5%/year for a long time. Near-clockwork 10% GDP growth produced 5% oil consumption growth. So 6% GDP growth would be 1% oil growth. 348k bpd is well above that.

    That diesel demand chart is very dramatic, if real. The drop is bigger than in 2008-09. It's also way too sudden to be EV related.
     
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  2. jhm

    jhm Well-Known Member

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    Please share your analysis of marginal GDP to marginal oil consumption rates. It would be good to see how constant this is over time. I see that in 2017 USD China's economy grew from $3.6T in 2007 to $12.2T in 2017, 13.0% CAGR. Meanwhile, consumption for all oil grew 5.1% CAGR. So I don't see how your 5%/year figure is holding up in the most recent decade.

    And yes, a 348kb/d growth--if that proves an accurate forecast--would be about a 2.5% growth in consumption. So I guess using your model, I should subtract about 7.9% GDP/oil efficiency from 6% to get to decline of about 2% rather than growth of 2.5%. Clearly such a simplistic model of the relationship between oil demand and GDP is doing a poor job of explaining why oil demand growth is so high. Even using your 5%/y figure, there is a substantial amount of noise between your 1% expected growth and 2.5% growth, if it proves actual.

    Additionally, the relationship between economy and fuel demand growth is complicated by the type of economic growth China is experiencing. It's economy is maturing and becoming more of a consumer economy. This is consistent with the observation that gasoline consumption has be growing at a faster rate than diesel consumption as the country increases private auto ownership. If you look at consumption stats, say from BP statistical review, you'll see that diesel demand peaked back in 2015, and it continued to fall in 2018 y/y. Certainly, EVs are not the only factor at play here, but they do erode long term demand creation and decouple economic growth from demand growth for specific fuels. As we have long discussed on this thread, the magnitude of diesel displacement by EVs is about 3 or 4 times that displacement of gasoline. This is especially true in China, where electric buses have come to dominate the municipal bus market. Moreover, it is hard to get good data on just how many EVs are going into heavy duty commercial use. So we are likely underestimating the diesel demand erosion occurring in China.

    What I see is that from 2012 to 2018 China's diesel consumption has grown a mere 12 kb/d, from 3468 kb/d in 2012 to 3480 kb/d in 2018. Meanwhile, China's GDP (in 2017 USD) grew from $8.6T to $12.2T, +42% in 5 years or 7.2% per year. That is some very serious economic growth to be fueled by almost no increase diesel consumption. So what might this mean for future demand growth? Do we need to see china return to double digit GDP over the next 5 years for diesel demand to pick up? Or is it possible that over the next 5 years EVs will both stimulate the economy while driving down marginal consumption of diesel? Either way, single digit GDP growth or double digit EV growth, it is not looking so promising for diesel demand growth. Additionally, the rise of EVs in the private auto space also erodes consumer driven demand for gasoline. Prospectively, this does not look so good for oil consumption the next 5 to 10 years. We are not yet at the peak for China's total oil consumption, but there is some serious demand erosion happening.
     
  3. Doggydogworld

    Doggydogworld Member

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    Your 13% CAGR growth rate is nominal, not real. China had zero years with 13% or greater real GDP growth from 2007-17, so 13% CAGR is mathematically impossible. This chart shows 6.8% real CAGR, but that's price adjusted. Wiki says real GDP growth rate for those ten years was:
    9.7, 9.4, 10.6, 9.5, 7.9, 7.8, 7.3, 6.9, 6.7, 6.8​

    That's 8.4% CAGR. Your 5.1% oil CAGR means they only improved oil efficiency at 3.3% per year the past decade. It's been at least five years since I looked at it, and GDP growth was higher then. A drop from ~5% to 3.3% could reflect the shift to more of a consumer model as you note. A 3.3% oil/GDP ratio improvement also matches 2019's trend of 2.5% oil growth and ~6% GDP growth.

    I don't know enough about Chinese diesel use to comment. This article says EV buses save 279k bpd of diesel. But at 5.1% CAGR diesel would have grown by 1200 bpd from 2012-18. There's clearly something else at work there.
     
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  4. jhm

    jhm Well-Known Member

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    You're correct. I mistakenly grabbed nominal GDP thinking it was real. This is what I get for a hasty post.

    Grabbing World Bank data and BP data, I am now able to estimate models of the form:

    RelChgFuel = a + b × RelChgRealGDP + error

    This is basically what you want to be able to set expectations around consumption growth given GDP growth. I'm estimating different models for different fuels and using 30 years of history ending 2018.

    In terms of R-sqared, diesel is the fuel most connected with China with GDP explaining 19% of the variation. Gasoline is 4.1% and total oil at 14%.

    Also the estimates of slope are 1.00 for diesel, 0.40 for gasoline and 0.54 for total oil. So again diesel has the clearest linkage with the economy. Intercepts are -0.026, 0.033, and 0.0126 respectively.

    In 2018 real GDP grew 6.6%. This implies fitted growth rates of 4.0%, 5.9%, 4.85% for the respective fuels. But actual tell a different story. They came in at -0.4%, 5.6% and 5.3%. So growth in total oil consumption was a little above (0.5%) what GDP would indicate, while diesel was substantially below (-4.4%). In terms of absolute missed, diesel was 152 kb/d below fitted expectation, gasoline 10 kb/d below, and total consumption 61 kb/d above expectation. This gap in diesel does look on scale with EV diesel displacement, 152 kb/d vs 279 kb/d per BNEF estimate. Also EV displacement of gasoline in China would be on scale with the observed shortfall of 10kb/d for gasoline.

    Just to set expectations, if RGDG growth is 6% this year, these models would expect 3.4% growth in diesel, 5.7% gasoline and 4.5% total oil. Near term estimates of 2.5% total growth, then would be a 2% disappointment for the oil industry.

    So even when we try to do a good job conditioning growth expectations on GDP, it looks like some other factor may be driving disappointment in motor fuel demand. And so far the gap is on scale with EV fuel displacement. My conclusion is that it oil analysts were doing careful econometric work on the potential impact of EVs on consumption growth, they would need to account for it in their models. It is no longer too small to be ignorable.

    Furthermore, there are two sorts of errors this failure can induce. It can mislead oil investors into thinking that demand is stronger than it really is, which leads to oversupply. And also it can mislead investors into thinking that China's economy may be in worse shape than it really is. That is, soft oil demand in China should not be taken as negative indicator for the whole economy. This is why I get so annoyed when analysts try to account for oil demand weakness by blaming the economy. We appear to be headed into oil oversupply. Blaming the economy does not help investors do a better job of allocating capital.
     
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  5. TheTalkingMule

    TheTalkingMule Distributed Energy Enthusiast

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    OPEC sees lower 2020 demand for its oil, points to surplus

     
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  6. TheTalkingMule

    TheTalkingMule Distributed Energy Enthusiast

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    So we have yet another week where a clear as day flashing alarm of supply/demand imbalance is followed by a Western power's military intervening in a situation Iran totally denies initiating. War is now the trailing indicator of stranded fossil assets. How could that go bad?

    U.K. Navy Thwarts Iranian Attempt to Block BP Tanker
     
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  7. mblakele

    mblakele pre-jackpot member

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    The Economist
    Latin America’s state-run oil giants are struggling
    The companies are unprepared for the looming energy transition

    [​IMG]

    [...]

    Those concerned about climate change might argue that the region’s inefficient state-run firms would do well to return more money to shareholders and invest the rest in cleaner energy. Rivals in other parts of the world are taking tentative steps in that direction. Statoil, Norway’s titan, has reinvented itself as Equinor; its portfolio comprises both oil projects and wind farms. Even the world’s oil colossus, Saudi Aramco, is making a bet on petrochemicals and refining, demand for which should remain robust even if a global carbon price one day depressed that for crude. Latin American oilmen are too consumed by old challenges to deal with these new ones.​
     
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  8. TheTalkingMule

    TheTalkingMule Distributed Energy Enthusiast

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    Sad to hear the Economist say crude demand will decrease due primarily to a carbon price. It's on track to peak in 5 years with no action at all. How can the Economist not be aware of this?
     
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  9. jhm

    jhm Well-Known Member

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    Why This Oil Rally Won’t Last | OilPrice.com

    Cunningham gets the predicament, but won't come out and say that OPEC is post its demand peak.

    Yes, Virginia, post-peak demand decline is real. Down 1.0 mb/d in 2019, down 1.3 or more in 2020, and down how much more in 2020?

    There is an ironic twist here. OPEC keeps serving up oil demand forecasts which are too aggressive. Let's be clear that consistently wrong forecasts exist as a propaganda instrument to influence policy and investment choices. So the aggressiveness of OPEC's total demand forecast is sending the wrong message to the oil market. It emboldens non-OPEC producers to keep expanding supply aggressively.

    The trouble is that many in the oil industry would think that a demand growth forecast of 1.14 mb/d in 2020 is conservative. It is odd, that that this forecast is exactly equal to the 1.14 mb/d forecast that OPEC currently has for 2019. It appears that OPEC disbelieves its usual modeling and is now capping the 2020 forecast to what they see for 2019. In other words, they believe that demand growth will decline in spite of what their usual analysis would tell them. So they may already be cluing into the possibility that aggressive demand forecasts only serve to weaken actual demand for OPEC oil.

    So we may actually be at a turning point. Demand growth is eroding quickly enough that it does not serve the interest of OPEC and other major oil producers to keep posting aggressive demand forecasts. Rather it would be much easier to support the price of oil if analysts would dial back the conventional bullishness and produce truly conservative forecasts.

    I suspect that OPEC is already starting this process of moving toward conservative demand forecasts, but they can't move so abruptly that it sets off alarm in the industry. So capping 2020 demand growth at 2019 levels is just an intermediate step. But even with this OPEC is looking at an OPEC demand decline of 1.34 mb/d on a base of 30.61 mb/d OPEC demand in 2019, a decline of 4.4%. That is a huge decline for OPEC to absorb on its own. But in reality if they are actually overforecasting demand growth by just 0.19 mb/d, then OPEC demand fall a full 5.0%. So aggressive demand forecasting could lead to actual declines in OPEC demand that are so large as to overwhelm OPEC's ability to cut production. This could throw the whole oil market into a crisis where OPEC cannot shore up the price of oil by itself.

    OPEC needs to be sending a stern message to other oil producers. Let's say OPEC does its own analysis and determines that it can only absorb a 1 mb/d decline in OPEC demand. The other 0.3 mb/d shortfall needs to be absorbed by non-OPEC producers. From a forecast-as-planning perspective, they should cut their forecast of total demand growth by more than 0.3 mb/d. So rather than capping at 1.14 mb/d, they could forecast, say, 0.8 mb/d total demand growth. This would send the policy signal that if demand growth is below 0.8 mb/d then the market is destabilized and prices tank to a level that OPEC cannot defend against. In reality, OPEC needs non-OPEC to dial its 2.4 mb/d production growth ambition for 2020 back by about 1.34 mb/d. So non-OPEC needs to thinking in terms of demand for non-OPEC oil being less than 0.8 mb/d. OPEC may do well to flip this analysis around tell non-OPEC producers what their net demand looks like. But as it stands non-OPEC is seriously oversupplying the market and not sharing the burden of curtailing production to support the price.
     
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  10. mspohr

    mspohr Well-Known Member

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    Oil and gas companies could face greater regulatory pressure to disclose their financial risks to climate change in a Democratic administration.

    Sen. Warren Proposes SEC Crackdown On Oil & Gas | OilPrice.com

    Senator Elizabeth Warren (D-MA) reintroduced legislation this week that would require publicly-traded companies to report their risks related to climate change. The Climate Risk Disclosure Act would direct the Securities and Exchange Commission (SEC) to issue new rules on reporting requirements, forcing oil and gas companies to report their exposure to climate change itself, but also to disclose their risks to climate policy, assuming governments seek to adhere to the Paris Climate Agreement.

    But at the same time – and this is where it directly relates to the oil and gas industry – as governments tighten the screws on climate policy, many fossil fuel companies could see their valuations plunge as many of their assets become worthless. “Experts estimate that if the world makes the changes necessary to meet the emissions goals of the Paris climate accord, at least 82% of global coal reserves, 49% of global gas reserves, and 33% of global oil reserves will have to go unused the next 30 years,” Sen. Warren wrote. “The market is not appropriately pricing in this risk,” and instead there is “an inflation of the value of fossil fuel companies that could burst and threaten the financial system.”
     
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  11. TheTalkingMule

    TheTalkingMule Distributed Energy Enthusiast

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    I don't think frackers care about forecasting, and I have a feeling they know very well the reality of this ticking clock. How could they not?

    As long as WTI futures are above $55ish they'll fill those contracts and banks will give them money so everyone gets their bonus/fee/commission.

    Soon enough investor sentiment will shift as reality becomes clear.....then it's over. It could literally when they all get back from the beach this September.
     
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  12. ABCTG

    ABCTG Member

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    What do you get if you are the mayor, and plan to close 3 gas powered electrical plants?

    Answer; The utility unions spending over $1million on attack ads

    (I have to believe there is also oil and gas money involved; spending all that money to protect 400 jobs seems a bit excessive.
    The oil and gas companies who supply the fuel to burn are seeking to protect their income.)

    The real stakeholders are the sellers of natural gas, but their M.O. seems to be making it about the loss of jobs, and giving perks to wealthy, when it is they who stand to benefit financially, and are allowed to freely pollute over the population of the city.



    Those ads ripping Garcetti on homelessness? They’re about fighting his Green New Deal

    Those ads ripping (Los Angeles Mayor) Garcetti on homelessness? They’re about fighting his Green New Deal



    Union leaders have launched a frontal assault on Garcetti’s sweeping environmental plan — and are using homelessness as a cudgel.

    You don’t know that it’s about shutting down fossil-fuel-powered plants in the basin,


    Driving much of the opposition is Garcetti’s plan to close three DWP plants powered by natural gas, a planet-warming fossil fuel, over the next decade. The plants employ more than 400 DWP workers.

    When Garcetti ran in 2013, a political action committee tied to the DWP union spent more than $3.8 million to attack Garcetti and back his opponent.

    representative would not say how much the group had spent on the ads, indicating only that it was more than $1 million.



     
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  13. Doggydogworld

    Doggydogworld Member

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    Public and quasi-public employee unions dominate CA politics. They will absolutely spend millions to make an example of a politician who doesn't do their bidding, because it keeps the rest in line.
     
  14. neroden

    neroden Model S Owner and Frustrated Tesla Fan

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    This is definitely the oil & gas companies. No union will spend this much for 400 jobs. $10K/year each is really a bit much for those workers to donate to their union's PAC. The money's coming from somewhere else.
     
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  15. mspohr

    mspohr Well-Known Member

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    Bloomberg - Are you a robot?

    Another factor increasing the cost of fossil fuel.

    Data for the study came from International Energy Agency and Exiobase. Over the 16-year period of the study (1995-2011), the average energy return on investment for fossil fuels at the finished stage declined by 23%.

    “There will continue to be a decline in those numbers for fossil fuels,” Brockway said. As easily accessible wells run dry, companies are forced to expend more energy extracting lower-quality products, which will then need even more refining.
     
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  16. mspohr

    mspohr Well-Known Member

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    Vast Subsidies Keeping the Fossil Fuel Industry Afloat Should be Put to Better Use - Resilience

    Capitalism has often been identified as the underlying cause of the climate crisis. A leading voice on the subject is Naomi Klein, one of the climate movements most influential thinkers, whose seminal book on climate change was subtitled Capitalism vs. the Climate. She is one of many voices identifying capitalism as the cause of climate change.

    Often central within the capitalism versus the climate framing is the idea that the heart of capitalist ideology – free market fundamentalism – has fuelled the climate crisis. But this line of argument often glosses over the fact that energy markets are not free from government intervention. In fact, the fossil fuel industry is deeply and increasingly reliant on government support to survive.

    In my chapter, I show that governments the world over favour fossil fuel interests through public financing, financial subsidies, and bailouts. In addition, the fossil fuel industry is helped by corrupt governance systems. Together this forms what I call a system of fossil fuel welfare and protectionism.

    To hide this reality, the fossil fuel industry has invested in a massive public relations scheme (read: propaganda campaign) to paint itself as the defender of the free market. In the US, the fossil fuel industry has even, quite successfully, duped Evangelicals into associating the fossil fuel industry with free markets, and free markets with God’s will. Thus, attacks on the fossil fuel industry become attacks on God’s will. But if God’s will was really aligned with the free market, then the fossil fuel industry would be doing the devil’s work.

    On the other side of the Atlantic, a recent International Monetary Fund (IMF) study showed that the US, the world’s largest historic greenhouse gas emitter, gives ten times more to fossil fuel subsidies than it does to education. Without such subsidies half of future oil production in the US would be unprofitable.

    As for coal, even the Wall Street Journal admits that US coal simply can’t compete on a level playing field, and is losing out despite its major subsidies. Studies reveal that without regulation to shield them from market forces, about half of the coal plants in the US would be going bankrupt.

    The IMF estimates that eliminating fossil fuel subsidies could free up US$2.9 trillion in government revenue annually. That amount is more than double the annual investment of US$1.25 trillion the International Energy Agency estimates is needed by 2035 in clean energy and energy efficiency to stop the world from warming by 2°C.

    To meet the much safer target of keeping warming to 1.5°C, would only require an additional $460 billion per year in clean energy and energy efficiency investments.

    [​IMG]
     
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  17. adiggs

    adiggs Active Member

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    An article about crude quality:
    Why Crude Quality Matters | OilPrice.com

    This is a topic that's come up a few times before - crude isn't a single homogenous thing - it's a label that covers a pretty wide range of similar stuff. I was excited to see this article because here's somebody in the oil industry talking about crude quality changes in the US, and how that looks like it's going to increasingly be a problem.

    (One bottom line takeaway - good thing we can export fracked oil, else the oil fracking boom'd be hitting a snag :D)
     
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  18. TheTalkingMule

    TheTalkingMule Distributed Energy Enthusiast

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    IEA forced to downgrade their 2019 oil growth projection for the 6th straight month. Now stands at 1.1Mb/d.

    Looking like 2019 will end with around 600-900kb/d of growth, less than HALF the projection on Jan1.
     
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  19. jhm

    jhm Well-Known Member

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    Banks and regulators care about forecasts. Frackers would care if credit were to dry up for them.
     
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  20. jhm

    jhm Well-Known Member

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    I'd also point out that the $5.2T subsidy is inducing 33.89 billion tonnes of carbon emissions. This a carbon subsidy to the tune of $153/t CO2 emission. So a carbon fee of say $100/t would still leave a net subsidy of $53/t on the table.
     
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