Shorting Oil, Hedging Tesla

[iPlug]

Maybe there is a happy price in the low $40s where OPEC+ can get solid revenue without conceding share to US shale.

Problem is their current budgets depend on price of oil $60-100, so civil unrest will ensue if this is not a temporary thing.

 

[jhm]

Problem is their current budgets depend on price of oil $60-100, so civil unrest will ensue if this is not a temporary thing.

True.

 

[renim]

So for the longest time, it seem US oil investors have followed the idea that they can produce as much as they like and count on OPEC+ to cut production and stabilize prices. ...

to be clear, OPEC was trying to publicly strongarm russia into a cut, OPEC Proposes a Large Cut in Oil Output I was surprised by how public this was.

Russia said nyet. and further than that, effectively publicly said their economy can handle a price war better than the middle east.

The only option for Saudi left is therefore price war with Russia. (or else Saudi loses prestige as lead of OPEC)

so basically Russia and Saudi are giving the world a giant stimulus package just as we all need it due to covid-19.

i think russia has clear thinking here, pain has arrived due to USA shale oil, no point to postpone dealing with it, whereas OPEC wanted to kick the can down the road.

but USA shale has all that DUC, that makes it resilient in ways that are painful for OPEC+

 

[TheTalkingMule]

Let us not forget the big picture for the Saudis, this may have been the plan all along. "IPO" in November then, after a respectable interval, go back to targeting marketshare. Makes complete sense.

 

[renim]

no, its not their plan A, its a backup plan B or C or D.
IPO allows them to Aramco as security for debt to handle a price war. Its a backup plan, not the optimal intent.

 

[TheTalkingMule]

Well technically it is optimal, pumping like mad is their only(economic, non-war) path to maximizing total revenue. They may not think or believe it's optimal but as the lowest cost producer it certainly is.

These guys have two ways they can go, pump or curtail. Clear as day to the whole world that curtailment has been soaked up and then some by US frackers. This dam was going to break soon enough, the only difference is the crazy instant lowering of prices to poke Russia.

In reality, we were going to $30 before May no matter what. Even without coronavirus.

 

[renim]

https://www.smh.com.au/world/north-...s-gain-angus-taylor-says-20200310-p548mp.html

That was well timed for Oz

 

[jhm]

https://www.smh.com.au/world/north-...s-gain-angus-taylor-says-20200310-p548mp.html

That was well timed for Oz

Hmm, we're at a time when the oil market has a surplus to squirrel away, but this deal is no net increase in reserves. That must be frustrating to the oil industry. But good on Australia.

 

[mspohr]

Saudi Arabia price war wipes billions from value of major oil firms

Saudi Arabia price war wipes billions from value of major oil firms

Analysts at Redburn warned that a six-month price war could take a major toll on oil company earnings, potentially bringing an end to dividends in favour of paying investors in company shares instead.

Shell and the US oil giant ExxonMobil are considered the most exposed to the market crash because they have high breakeven oil prices. Exxon requires oil prices of about $74 a barrel to cover its costs while Shell needs $65 a barrel to break even, the analysts said. BP is relatively stronger, thanks to a $53-a-barrel breakeven oil price.

 

[jhm]

Gaslighting on emissions: IEEFA says burning LNG "worse than coal" for climate | RenewEconomy

It's time to stop acting like one fossil fuel is cleaner than others. They all need to be replaced with renewable energy quickly.

 

[jhm]

Saudi Arabia To Flood Oil Markets With An Extra 2.6 Million Bpd | OilPrice.com
Russia Fires Back: Could Boost Oil Production By 500,000 Bpd | OilPrice.com

Let's keep score.
Saudi Arabia will boost crude production 2.3 mb/d.
Russia will add 0.5 mb/d.

Looks like SA is winning.

 

[iPlug]

Well technically it is optimal, pumping like mad is their only(economic, non-war) path to maximizing total revenue. They may not think or believe it's optimal but as the lowest cost producer it certainly is.

These guys have two ways they can go, pump or curtail. Clear as day to the whole world that curtailment has been soaked up and then some by US frackers. This dam was going to break soon enough, the only difference is the crazy instant lowering of prices to poke Russia.

In reality, we were going to $30 before May no matter what. Even without coronavirus.

SA is ~10m bbd right now. So to maintain budget long term, they would need to double output at current prices, but apparently only have capacity to go to 12m bbd at this point.

Since the writing is already on the wall, their best long term economic strategy should be to ramp up to current max capacity and quickly build out new production to chase everyone else out of the market until demand is ~0.

 

[jhm]

Gas Could Be In Even Bigger Trouble Than Oil | OilPrice.com
This gas bubble has been forming for quite awhile. They still don't get it: wind, solar and batteries are putting the skids on new demand for gas.

What could possibly help gas prices? Europe is full of gas to the gills. So is Asia. The Energy Information Administration has forecast that U.S. gas inventories will hit a record later this year, at 1.935 trillion cu ft, which would be 12 percent above the five-year average. Production shows no signs of slowing mostly because a lot of the gas produced in the United States is associated gas from oil wells in the shale patch. There seems to be no way up for prices, and this means more pain for some gas producers, especially pure-play upstream companies in the U.S.

The transportation problem remains although relief is coming in the form of the Permian Highway gas pipeline Kinder Morgan got cleared to build earlier this month. The pipeline will carry 2 billion cu ft of gas daily to the Houston area. Yet it won’t change demand and domestic demand for gas in the United States is saturated. As one analyst put it to Bloomberg the world needs more gas-fired power generation capacity for gas prices to recover.

“Prices globally are converging and until there is a boatload of new generation built domestically and abroad, there is just simply not much room in the market,” Campbell Faulkner, OTC Global Holdings chief data analyst said earlier this month.

Get a clue: There will not be "a boatload of new generation built." The gas industry is little more than a cargo cult at this point.

 

[larmor]

SA is ~10m bbd right now. So to maintain budget long term, they would need to double output at current prices, but apparently only have capacity to go to 12m bbd at this point.

Since the writing is already on the wall, their best long term economic strategy should be to ramp up to current max capacity and quickly build out new production to chase everyone else out of the market until demand is ~0.

This is akin to the uber playbook, flood the market with cut throat prices, and when all competition is forced out, then, presumably raise the prices. From an investor perspective, this would be a ponzi scheme...

 

[renim]

fwiw, if DUCs have a breakeven of between $20 and $30 and there is a 6 (?) month backlog, then America could (edit maintain production despite) low gas prices all the way to Oct/Nov. This would benefit the general population and therefore the incumbent.

at least America has elections, there could be collapse in many lessor OPEC states (Iraq, UAE, Libya, Kuwait, Venezuala, Algeria, Iran, Angola). The price war is called by Saudi, but mostly the others have the most to lose.

 

[renim]

old figure (perhaps 2016)

 

[jhm]

fwiw, if DUCs have a breakeven of between $20 and $30 and there is a 6 (?) month backlog, then America could have low gas prices all the way to Oct/Nov. This would benefit the general population and therefore the incumbent.

at least America has elections, there could be collapse in many lessor OPEC states (Iraq, UAE, Libya, Kuwait, Venezuala, Algeria, Iran, Angola). The price war is called by Saudi, but mostly the others have the most to lose.

Interesting. Saudi Arabia wants to produce an incremental 2.3 mb/d, but they'll need to push the price down to $20 just to push about 1.4 mb/d of DUCs out of the market. Meanwhile, Russia puts another 0.5 mb/d on the market too. Demand growth is expected to be -0.090 mb/d. So the market could be oversupplied to the tune of 1.5 mb/d with prices below $20.

I suppose there are other producers that get pushed out of the market too. So this assessment is overstating the case. But even so, if the objective is to push US shale out to the market, the Saudis and Russians are into serious overkill. I suspect if they just hold back on expanding production, Brent could stabilize between $30 and $40. This pricing war is threatening to drive prices down to half this level. I think this is economic suicide. My hunch is that both the Saudis and Russians are bluffing. Bring out the popcorn.

 

[adiggs]

I find that this is madness I can get behind. Let the market and independent actors have their way.

(And no US oil industry bail out - we need some bankruptcy court magic)

 

[renim]

.... My hunch is that both the Saudis and Russians are bluffing. Bring out the popcorn.

I don't think either are bluffing, but I don't think American shale production will change much either. The obvious casualties would be smaller oil companies outside of USA/OPEC+ ie north sea oil, south america, australia, africa (nigeria angola).

For what its worth, I have some shares in an ASX100 oil producer, they dropped almost as much as the national airline shares did. hmmmmm

 

[renim]

i would also add, it takes time to ship oil to destinations, just because the daily price has dropped, doesn't mean the delivered price has dropped much.