Shorting Oil, Hedging Tesla

[mspohr]

Cutting Fossil Fuel Subsidies Could Be Even More Beneficial Than We Realized

What’s more, the emissions reductions resulting from slashing subsidies could be even greater than that because it could significantly change the oil industry. More of the world’s energy comes from oil than any other fuel, and the industry is still expanding quickly, in part because subsidies make exploration and expansion much cheaper. Without subsidies, corporations may not actually grow their drilling operations nearly as much because it would be too risky to invest that much of their own money or take out loans.

 

[mspohr]

Comprehensive review of oil price/production factors:

Peak Oil Review: 10 February 2020 - Resilience

A few highlights:

“Oil may be the most critical of the raw material resources the current industrial ecosystem consumes…. Oil will peak in production, not because there is not enough reserves in the ground to meet demand, but because consumers cannot support the oil price at a level that allows oil producers to remain economically viable. [Our analysis shows] that global peak crude oil production is relatively soon. The EIA projections of peak oil around 2040, are highly unlikely.


Geological Survey of Finland, in “Oil from a Critical Raw Material Perspective” (published 12/22/19)

John Hess, CEO of Hess Corp., recently said that production in the Bakken could peak within the next two years, and the Permian will peak in the mid-2020s. Others have said that the Permian peak may arrive sooner. Steep decline rates mean that any slowdown in the pace of drilling will quickly impact production. Financial stress in the shale industry may bring a peak in shale production sooner than many believe.

As the coronavirus continues to spread across China, some observers are starting to fear that this pandemic could trigger a worldwide depression unless it is brought under control soon. As the situation worsens, Beijing is censoring more news, so that much of what the world knows is coming from a scattering of foreign news organizations.

As of last week, some two-thirds of China’s economy was shut down. More than 80 percent of its manufacturing industry was closed, including 90 percent of exporters. China is now contributing 17 percent to the world’s GDP and is deeply integrated into international supply chains. It was just 4.5 percent of world GDP during the SARS epidemic in 2003.

 

[TheTalkingMule]

February 20th will be 13 days past Chinese workers coming off holiday, a point past the max incubation of coronavirus. I think we'll see the V shaped recovery at that point and "energy" will recover. Then it's time to short as the impact of this hiccup could very well be a deathblow to certain fossil operators.

 

[Oil4AsphaultOnly]

February 20th will be 13 days past Chinese workers coming off holiday, a point past the max incubation of coronavirus. I think we'll see the V shaped recovery at that point and "energy" will recover. Then it's time to short as the impact of this hiccup could very well be a deathblow to certain fossil operators.

Any short funds that target shale producers only?

 

[TheTalkingMule]

Any short funds that target shale producers only?

I assume there are plenty, but they you run into the problem of buying a whole sector. There will be some winners that buy up cheap assets and capture flash spikes in pricing. No idea who I'm going to target, starting the conversation tomorrow.

I think we word is out on smaller US service companies being near worthless, but it's gonna be quite a surprise when 1 or 2 of the majors dip below TSLA in SP. These dividends can simply not be maintained.

 

[jhm]

My prediction is that within two years Tesla will surpass ExxonMobil in market cap.

 

[ggies07]

My prediction is that within two years Tesla will surpass ExxonMobil in market cap.

 

[adiggs]

My prediction is that within two years Tesla will surpass ExxonMobil in market cap.

I dunno @jhm - that seems like a pretty safe prediction; safer than I normally associate with you

I show XOM at $255B market cap, and TSLA at around $125B market cap. Maybe I'd go with 2 years to XOM and TSLA switching places!

 

[jhm]

I dunno @jhm - that seems like a pretty safe prediction; safer than I normally associate with you

I show XOM at $255B market cap, and TSLA at around $125B market cap. Maybe I'd go with 2 years to XOM and TSLA switching places!

Yes, we're saying the same thing. In two years, XOM market cap will likely fall below $220B. I think TSLA can reach that.

Wait. Maybe I am misinterpreting your statement. Are you projecting that in 2 year XOM will be at $125B and Tesla at $255B?

BTW, Tesla is currently at $140B.

 

[adiggs]

Wait. Maybe I am misinterpreting your statement. Are you projecting that in 2 year XOM will be at $125B and Tesla at $255B?

I at least think it's more likely this - that they switch market caps - than XOM is flat and Tesla catches and passes

It's also reasonable to read me as being more flip and funny, than doing any deep analysis here. I don't know when the cliff will come for XOM, but when it arrives it's gonna be savage. I can construct a scenario where XOM is one of the 'survivors' for quite awhile, as their perceived strength enables them to buy up bankrupt assets for big enough discounts, that it enables them to keep the party going for a few years.

Or I can construct a scenario where people with money realize that XOM is borrowing that money to pay it back out in dividends, and those investors with money suddenly decide that's a bad way to invest money. Suddenly XOM Is looking at a big cash crunch, cuts the dividend (and when it gets cut, I expect it to virtually disappear as the bad news needs to get recognized all at once), and is then themselves one of the companies in bankruptcy (possibly selling off assets at distressed prices so somebody else can keep the party going for a few extra years).

My mental model for the reaper awaiting oil & gas is what has happened to market caps in the coal industry. Something like 99.99% loss of market capitalization, as US energy share of coal shrank from something like 33% to 20 or 25%. The volume usage of coal has shrunk, and noticeably, but not all that much. The value of the businesses is down to the value to a single owner and the cash flow they can generate. There's no long term, and there's no growth, in ownership of coal mining businesses. The coal industry also has a lot more shrinking to do.

O&G starts bigger, and hasn't yet started the serious market cap losses.

(And I realize this isn't anything new for you - for new reads of the thread, this might serve as a few pointers and recap from the last few years)

 

[jhm]

Has anyone thought of shorting CRAK? This is an ETF that tracks refineries. We've given a fair amount of attention to shorting crude, but not so much refiners. If memory serves me Cheveron and ExxonMobil are suffering from refinery losses. CRAK may be an interesting way to trade oil disruption. As demand declines in some places, it can create surplus refining capacity. The natural response is more refined products to be exported. So this undermines refiner profits everywhere. Then as a second feature displacement from EVs can lead to surpluses of motor fuel. Shifts in product mix demanded will be hard for refiners to adjust to. So there is a plausible chance that refiners may be impacted earlier by EV distruption than crude producers.

 

[Oil4AsphaultOnly]

Has anyone thought of shorting CRAK? This is an ETF that tracks refineries. We've given a fair amount of attention to shorting crude, but not so much refiners. If memory serves me Cheveron and ExxonMobil are suffering from refinery losses. CRAK may be an interesting way to trade oil disruption. As demand declines in some places, it can create surplus refining capacity. The natural response is more refined products to be exported. So this undermines refiner profits everywhere. Then as a second feature displacement from EVs can lead to surpluses of motor fuel. Shifts in product mix demanded will be hard for refiners to adjust to. So there is a plausible chance that refiners may be impacted earlier by EV distruption than crude producers.

Isn't kerosene one of the products of cracking? The airline industry needs might slow their demise significantly.

 

[jhm]

Isn't kerosene one of the products of cracking? The airline industry needs might slow their demise significantly.

Yes, it's part of the product mix. But if demand for kerosene grows relatively higher than for gasoline and diesel, then refiners will need to get more of their margin from kerosene. In the extreme motor fuels could be unprofitable so as to produce enough kerosene. This means the profit margin on kerosene would need to go up to compensate. Thus, hard to substitute fuels can become more expensive while demand for easy to substitute fuels declines. This kills off total demand for crude and makes it harder for refiners to be profitable. Their refineries are not optimized for the new mix of product demand, and it take substantial capex to upgrade a refinery to optimize the fuel mix. Coming up with that capital at a time when their is surplus capacity in the market will be tough. So there will be multiple stressors coming into play at the same time.

 

[Oil4AsphaultOnly]

Yes, it's part of the product mix. But if demand for kerosene grows relatively higher than for gasoline and diesel, then refiners will need to get more of their margin from kerosene. In the extreme motor fuels could be unprofitable so as to produce enough kerosene. This means the profit margin on kerosene would need to go up to compensate. Thus, hard to substitute fuels can become more expensive while demand for easy to substitute fuels declines. This kills off total demand for crude and makes it harder for refiners to be profitable. Their refineries are not optimized for the new mix of product demand, and it take substantial capex to upgrade a refinery to optimize the fuel mix. Coming up with that capital at a time when their is surplus capacity in the market will be tough. So there will be multiple stressors coming into play at the same time.

True, but kerosene happens to be heavier than gasoline, yet lighter than diesel. So from a refining standpoint, it's not too far off from one or the other, which should reduce the cost to produce more kerosene in a refinery that produces both gasoline and diesel (which should just be different distillers in the same refinery).

Aren't refineries specialized to the types of crude (light sweet, versus heavy, versus tar) that they can process? If so, then I think refineries that handle the "domestic sweet light" that's coming out of the permian basin (enabled by fracking) are more likely to be affected as investment dollars dry up.

Or would Canada's Alberta tar sands be impacted first due to their high processing costs and need for high oil prices (which isn't coming back no matter what OPEC does)?

 

[adiggs]

True, but kerosene happens to be heavier than gasoline, yet lighter than diesel. So from a refining standpoint, it's not too far off from one or the other, which should reduce the cost to produce more kerosene in a refinery that produces both gasoline and diesel (which should just be different distillers in the same refinery).

Aren't refineries specialized to the types of crude (light sweet, versus heavy, versus tar) that they can process? If so, then I think refineries that handle the "domestic sweet light" that's coming out of the permian basin (enabled by fracking) are more likely to be affected as investment dollars dry up.

Or would Canada's Alberta tar sands be impacted first due to their high processing costs and need for high oil prices (which isn't coming back no matter what OPEC does)?

While conceptually true (kerosene sits between gasoline and diesel), that's a high level simplification. Here's an 83 page overview of the refining process
https://nptel.ac.in/content/storage2/courses/103103029/pdf/mod2.pdf

Just reading the first few pages will provide a good overview and some of the different characteristics being tested for.


The two primary characteristics of crude (they even show up in the name) as I understand them:
- light vs. heavy. A measure of the density and/or the fraction of the crude in the longer chain hydrocarbons. Heavy crude has more of the longer chain hydrocarbons. I believe that, everything else being equal, it's easier to get diesel (and kerosene) from heavy crude. Light crude has, on average, shorter chain hydrocarbons, so it's easier to get gasoline (and propane, and the other shorter products).
- sour vs. sweet. A measure of the sulphur content. I don't think it's as simple as "sweet = good; sour = bad", but it is my understanding that there's more refining effort for sour crude, where that effort is devoted to removing, or at least reducing, the sulphur in the crude.

Of course, both of these dimensions are on a continuum - not just two simple binary values.


I have a larger general impression of the refining process is that in theory, you can take just about any crude oil feedstock and get at least some of any product output. And you can combine the intermediate products (and/or finished products) with more processing effort (money) and get other finished products.

However, the more processing you do along the way from crude to finished product, the more equipment and input materials you need (cost / money), and the less economical your refining process will be. This leads to the different equipment optimizations made by different refineries - they design around oil that comes in particular grades, which frequently means particular oil wells and fields, and that gets them their least cost / maximum output refining result.

Which is great as long as the relative economic value of the outputs are reasonably stable relative to each other.

The most extreme version I've heard of - I was reading an article recently about the IMO 2020 changes for the fuel used in shipping. The end result is low sulphur emissions, with 2 approaches to get there. One option is to change from burning bunker fuel (one step or 2 up from asphalt ) to a low sulphur (effectively) diesel. The other option is keep burning the bunker fuel, but add scrubbers that capture the sulphur after the bunker fuel is burned, so that emissions are below the sulphur threshold. (Turns out there are good benefits to going the scrubber route, and the economics are tightly balanced - overall the fleet will do a mix of both).

Anyway - there are a small number of oil wells in the world that produce a low sulphur crude that is close enough to the low sulphur fuel requirements for IMO 2020, that there is a reasonable way to get fuel for your ships - buy the crude from those particular oil wells and burn it directly in your ships. It's about the same as bunker fuel, while having low enough sulphur to pass the new restrictions. Zero refining needed (apparently). Hah! I found an article about this dynamic:
Bloomberg - Are you a robot?


Oh - and I should mention that I'm not a petroleum engineer or even a chemist. I just got interested in the topic by participating in this thread way too much, for way too long. So be sure and chew that salt you're eating this with

 

[TheTalkingMule]

On a related note.....when "shorting oil" I'd like to understand the profitability of all downstream activities. XOM, and seemingly everyone else, is losing millions on refining and chemicals these days. Why?

I can understand why extraction is in the crapper, but crude being oversupplied doesn't mean you can't make money on products. So what's up? Is it a function of diesel having peaked and the product demand mix changing?

What will it take for refining to return to profitability?

 

[adiggs]

On a related note.....when "shorting oil" I'd like to understand the profitability of all downstream activities. XOM, and seemingly everyone else, is losing millions on refining and chemicals these days. Why?

I can understand why extraction is in the crapper, but crude being oversupplied doesn't mean you can't make money on products. So what's up? Is it a function of diesel having peaked and the product demand mix changing?

What will it take for refining to return to profitability?

My partial answer to your group of questions - focus on the product mix and the historical profitability of those products, and how that's changing. I think that broadly speaking, refiners look to some outputs to make them money, and then sell the rest of the output for whatever they can get for it.

Here's an article that talks about the broad dynamic:
Refinery Economics | Natural Resources Canada

 

[jhm]

Global Energy Emissions Are Falling Flat | OilPrice.com

This is hopeful, kinda. Emissions are falling in the near term, but the EIA still can't figure out which end is up for the long term.

Check out this humorous chart.

So let's make sense of the chart on the right. Coal has gone into massive decline since 2005. The EIA sees this trend continuing another 5 years. Then, wham, in 2025, when wind, solar and batteries are all cheaper then they've ever been, coal hits brick wall and won't fall any further. Huh, what the heck is happening here? The whole thing is based on policies and currently scheduled closure. So the queue of scheduled closures only goes out to about 2026. So inspite of the massive economic working against coal, the EIA is just taking dictation from politicians here. It's just disgusting that they have the audacity to make a longterm forecast that goes out further than their methodology has inputs and then claim that emissions go up in the future. This is amazingly stupid.

 

[jhm]

A Third Of Fossil Fuel Assets May Soon Be Stranded | OilPrice.com

I have a new pet peeve, "stranded assets." Asset impairment is the correct term, well defined in accounting practice, and much more comprehensive in scope. Price competition from renewables, EVs and other clean tech is causing fossil assets to lose value, and they can lose even more value by over supplying the market than by simply leave a few hydrocarbons in the ground.

 

[TheTalkingMule]

From Reuters today....

The International Energy Agency (IEA) expects oil demand in the first quarter to fall for the first time in 10 years before picking up from the second quarter. The agency cut its full-year global growth forecast to 825,000 bpd.

So we've nearly halved the IEA 2020 crude demand growth projection in the last 6 months. Where does that put us in reality? +500kb/d for 2020 growth? Could that all be wiped out by a recession that hits later this year?

Certainly could IMO. Who would've thought that peak oil demand would be 2019!