Shorting Oil, Hedging Tesla

[jhm]

At Friday close,

ExxonMobil $184.5B mkt cap
Tesla $178.0B

ExxonMobil has been coming down in value. Tesla share price only needs to return to $995 for Tesla to surpass ExxonMobil. This is doable next week.

 

[jhm]

Oil Demand From Road Transport: Covid-19 and Beyond | BloombergNEF
Peak Fuel Demand Will Occur Within 10 Years | OilPrice.com

Increasingly, the forecasts of BNEF sound more like they are dictated by the oil industry itself.

Irina Slav, in fact points to this shift, but does not seem to recognize the importance of it.

In an outlook for road fuels published earlier this month, BloombergNEF forecasts that gasoline demand will peak in 2030, with diesel following three years later. As a result, demand for crude oil from the road transport sector is seen peaking in 2031, BloombergNEF said, at 47 million barrels daily. That’s higher than BloombergNEF’s 2019 projection, which saw oil demand from light and heavy-duty vehicles peaking at 45.1 million bpd.

Slav is framing this story as yet another opportunity for the oil and gas industry to be shocked by how quickly peak demand is coming. And yet, BNEF has been backpedaling its forecast for years. When BNEF first raised the question of EVs disrupting oil demand, they were pointing to a potential peak around 2025. But ever since they have been pushing that out. Now they are placing mere gasoline peak at 2030 and diesel years after that. So by implication peak crude demand is well after 2030 according to BNEF projections. Meanwhile, over this same time frame the oil industry started out with peak oil demand after 2040, but have progressively upped that to an event before 2030.

How is it the BNEF is now projecting peak demand to happen years later than what many in the oil industry are projecting? BNEF has lost credibility and respect with me.

 

[EinSV]

Oil Demand From Road Transport: Covid-19 and Beyond | BloombergNEF
Peak Fuel Demand Will Occur Within 10 Years | OilPrice.com

Increasingly, the forecasts of BNEF sound more like they are dictated by the oil industry itself.

Irina Slav, in fact points to this shift, but does not seem to recognize the importance of it.


Slav is framing this story as yet another opportunity for the oil and gas industry to be shocked by how quickly peak demand is coming. And yet, BNEF has been backpedaling its forecast for years. When BNEF first raised the question of EVs disrupting oil demand, they were pointing to a potential peak around 2025. But ever since they have been pushing that out. Now they are placing mere gasoline peak at 2030 and diesel years after that. So by implication peak crude demand is well after 2030 according to BNEF projections. Meanwhile, over this same time frame the oil industry started out with peak oil demand after 2040, but have progressively upped that to an event before 2030.

How is it the BNEF is now projecting peak demand to happen years later than what many in the oil industry are projecting? BNEF has lost credibility and respect with me.

BNEF is basically a consulting business. Its automotive consulting business is in bed with "almost every major automaker in the world." I assume other teams also consult with the oil industry.

Putting out forecasts that would upset their clients by implying the need for radical and unwelcome change that is too far out of step with their clients' thinking would be bad for business.

They seem to have staked out the position where they can wear the "white hat" by being slightly less pessimistic than organizations like the IEA, while still being totally unrealistic.

 

[TheTalkingMule]

A strange article from Bloomberg, but at least they're somewhat realizing there's nothing to be done on the supply side.

Link

Trump’s Inaction Makes Oil Market Management Harder

Whatever happens with the pandemic, an oil output deal that doesn't include the world's biggest producer makes it even harder to do.

Huh? Trump can make an output deal on behalf of privately owned US oil producers? Do tell!

The unprecedented OPEC+ deal in April, which led to drastic output cuts, is now entering its most dangerous phase, with oil demand and prices recovering. At the time, President Donald Trump claimed credit for the breakthrough, even though the U.S., the world’s biggest oil producer, wasn’t part of the agreement. Now the American president could play a pivotal role in its fate, not by calling the leaders of Saudi Arabia and Russia, but by acting decisively — or failing to act — to contain a resurgence of the Covid-19 outbreak in the U.S.

Yes, it's demand stupid.

Now put those two things together and tell me what it spells.

 

[ggies07]

How is it the BNEF is now projecting peak demand to happen years later than what many in the oil industry are projecting? BNEF has lost credibility and respect with me.

This is sad to see....could it have been when Michael Liebreich left?

 

[mblakele]

Oil companies’ diversification into petrochemicals may not go to plan
Investment in plastics may prove too much of a good thing for the oil industry

OIL ANALYSTS debate the future of transport fuels. That of petrochemicals—used to make everything from plastic packaging to paint—has seemed unequivocally bright. The International Energy Agency (IEA), an industry forecaster, expects them to account for half the growth in oil demand from 2019 to 2025. Better yet, America’s shale boom has furnished cheap feedstock in the form of natural gas. ExxonMobil is spending $20bn on chemical and refining facilities along America’s Gulf Coast, near Texas’s Permian basin. Royal Dutch Shell is building a huge complex in Pennsylvania, atop the Marcellus shale formation—President Donald Trump has called it “one of the single biggest construction projects in the nation”. Saudi Aramco, the largest oil firm of all, this month completed its $69bn acquisition of a 70% stake in SABIC, Saudi Arabia’s chemicals giant.

Covid-19 would seem to validate such moves. Use of petrol, diesel and jet fuel has plunged amid lockdowns but plastic packaging and medical supplies are in high demand. However, diversification that makes sense for any individual firm may prove risky for the industry as a whole.

[...]

The trouble is that too many big oil companies are making the same bet. Last year the increase in ethylene capacity was 60% higher than the rise in ethylene demand, according to the IEA.

The subsequent decline in ethylene prices had little impact on companies’ strategies. In November Bernstein, a research firm, tallied nearly $40bn a year in planned capital spending on petrochemical facilities from Shell, ExxonMobil, Total, Chevron Phillips Chemical, Aramco, Abu Dhabi’s ADNOC, Russia’s Gazprom and Rosneft, and China’s Sinopec. All told, global ethylene capacity would rise by about 13m tonnes annually over the next few years, once again about 60% more than the annual rise in demand.

[...] coronavirus looks unlikely to sap individual oil firms’ enthusiasm for petrochemicals. Extra demand for single-use plastics during the pandemic has combined with lower appetite for recycled goods to lift ethylene prices a bit since April. Converting ethane to ethylene is still profitable, says Alan Gelder of Wood Mackenzie, an energy-research firm, “just not as profitable as some hoped”. For many oil companies facing sceptical investors and an upstream business with uncertain short- and long-term prospects, petrochemicals have the dubious honour of being among their least bad options.​

 

[jhm]

This is sad to see....could it have been when Michael Liebreich left?

When did he leave?

 

[jhm]

U.S. LNG Industry Needs Prices To Double | OilPrice.com

LNG producers like Tellurian need long-term LNG contracts with pricing above $5/MMBtu to go forward with projects to develop incremental capacity. This looks increasingly unlikely. Gas analysts seem to ignore the fact that in many places in the world wind, solar and battery storage now is cheaper than coal and gas generation. Yes, we are in a short-term situation where there is oversupply in the gas markets, but the critical issue for building out new LNG capacity is obtaining long-term purchase commitments. This of course is the same challenge that RE developers face. So with solar and wind producers competing to eek out a few contract, they are very hungry and compete with new gas generation projects that would need to lock in LNG supply contracts to assure that they pencil out too. Thus, a 10-year LNG supply contract is in direct competition with a 10-year PPA for WSB.

There are two ways out for WSB developers:

1. LNG, gas and coal producers capitulate and the development of new FF generation capacity halts.
2. Batteries, solar and wind continue to cut costs along their respective experience curves.

The second option has been in play for decades and will continue even if LNG exits the new capacity market. So the critical question is when LNG will capitulate.

When LNG throws in the towel will have a major impact on the oil & gas industry. For the past 5 years or so, oil majors have tried to pivot to gas as their growth story. In part, this is why the LNG market is so oversupplied today and even before Covid19 was a thing. The global LNG price was supposed to assure that surplus gas anywhere could fetch a reasonable price. That is LNG as an offtake market would set a floor on the price of domestic gas anywhere it was produced. This gave the O&G industry confidence to pursue oil development projects with potential for a high gas to oil ratio. So the industry is losing both its growth story and the safety of a global floor on gas prices.

I think O&G are past due for capitulation. Covid-19 simply exposes how over-extended these investments have become. The globe simply does not need so much capital to flow into fossil fuels of any sort. And the longer the industry refuses to accept this, the more spectacular the losses must be to stop the collective stupidity. Let's hope Tellurian delays their FID for a really long time, long enough to realize that the globe will never need more LNG capacity.

 

[adiggs]

Seen this before:
Fossil Fuels Make Up 84 Percent Of The Global Energy Market | OilPrice.com

If only fossil fuels made up 84% of the value of the global energy market as well. That's the thing I consistently find missing in arguments like these. Yes, fossil fuels will be part of our life, probably for a few decades to come.

But the valuation of the industry is about to plummet as it transforms from the growth business that powers modern society, to the dividend generating business that is permanently shrinking.

Unit volumes = good; market cap = bad.


If only these articles would make the second point as well. And it's not just journalists.

 

[jhm]

Oil companies’ diversification into petrochemicals may not go to plan
Investment in plastics may prove too much of a good thing for the oil industry

OIL ANALYSTS debate the future of transport fuels. That of petrochemicals—used to make everything from plastic packaging to paint—has seemed unequivocally bright. The International Energy Agency (IEA), an industry forecaster, expects them to account for half the growth in oil demand from 2019 to 2025. Better yet, America’s shale boom has furnished cheap feedstock in the form of natural gas. ExxonMobil is spending $20bn on chemical and refining facilities along America’s Gulf Coast, near Texas’s Permian basin. Royal Dutch Shell is building a huge complex in Pennsylvania, atop the Marcellus shale formation—President Donald Trump has called it “one of the single biggest construction projects in the nation”. Saudi Aramco, the largest oil firm of all, this month completed its $69bn acquisition of a 70% stake in SABIC, Saudi Arabia’s chemicals giant.

Covid-19 would seem to validate such moves. Use of petrol, diesel and jet fuel has plunged amid lockdowns but plastic packaging and medical supplies are in high demand. However, diversification that makes sense for any individual firm may prove risky for the industry as a whole.

[...]

The trouble is that too many big oil companies are making the same bet. Last year the increase in ethylene capacity was 60% higher than the rise in ethylene demand, according to the IEA.

The subsequent decline in ethylene prices had little impact on companies’ strategies. In November Bernstein, a research firm, tallied nearly $40bn a year in planned capital spending on petrochemical facilities from Shell, ExxonMobil, Total, Chevron Phillips Chemical, Aramco, Abu Dhabi’s ADNOC, Russia’s Gazprom and Rosneft, and China’s Sinopec. All told, global ethylene capacity would rise by about 13m tonnes annually over the next few years, once again about 60% more than the annual rise in demand.

[...] coronavirus looks unlikely to sap individual oil firms’ enthusiasm for petrochemicals. Extra demand for single-use plastics during the pandemic has combined with lower appetite for recycled goods to lift ethylene prices a bit since April. Converting ethane to ethylene is still profitable, says Alan Gelder of Wood Mackenzie, an energy-research firm, “just not as profitable as some hoped”. For many oil companies facing sceptical investors and an upstream business with uncertain short- and long-term prospects, petrochemicals have the dubious honour of being among their least bad options.​

Speaking of diversification into petrochem...

BP Sells Global Petrochemical Business In $5 Billion Deal | OilPrice.com

BP is divesting $5B petrochem business. They are in distress, having to lay off 10k worker. I suspect their balance sheet is a mess, motivating this sell. But maybe they also got the message that petrochem won't save the industry.

 

[jhm]

Seen this before:
Fossil Fuels Make Up 84 Percent Of The Global Energy Market | OilPrice.com

If only fossil fuels made up 84% of the value of the global energy market as well. That's the thing I consistently find missing in arguments like these. Yes, fossil fuels will be part of our life, probably for a few decades to come.

But the valuation of the industry is about to plummet as it transforms from the growth business that powers modern society, to the dividend generating business that is permanently shrinking.

Unit volumes = good; market cap = bad.


If only these articles would make the second point as well. And it's not just journalists.

Yeah, it's not 84% of the "value" of global energy, just 84% of "primary energy," which includes all the waste heat which has no value once a fuel is combusted.

That said, this is a really tired trope. "Look how big fossil fuels are!" Size is mostly a function of legacy, not present day competitiveness. Moreover, if we were to put a value on this, in many case fossil fuels are either more expensive than renewables or priced too low to be profitable, often both. So being more costly than renewables is not really a thing to be celebrated. Without a huge legacy lead, fossil fuels would have a really hard time keeping scale with renewables. This is why I get so frustrated with the over-investment in fossil fuels. They really do not merit the capital that they squander on producing wasteful gluts while investment levels in renewables are too low to avoid climate change.

Don't get me started.

 

[jhm]

At Friday close,

ExxonMobil $184.5B mkt cap
Tesla $178.0B

ExxonMobil has been coming down in value. Tesla share price only needs to return to $995 for Tesla to surpass ExxonMobil. This is doable next week.

At close Monday, 6/29/2020,

ExxonMobil $187.5B
Tesla $187.2B

 

[TheTalkingMule]

Chesapeake Energy went bankrupt on the same day TSLA surpassed XOM. Didn't see that *sugar* coming 4 or 5 years ago!

P.S. TSLA then dipped back below XOM at close.

Edit: Maybe I should read today's posts first!

 

[ggies07]

When did he leave?

hmm...maybe he didn't leave entirely, just stepped down:

Bio - liebreich

He remained CEO of Bloomberg New Energy Finance, until 2014, then became Chairman of the Advisory Board; since the start of 2018 has been a Senior Contributor.

 

[RobStark]

Oil major Shell to write down up to $22 billion of assets in second quarter

 

[jhm]

ExxonMobil is taking a dive today, while Tesla is making a solid move up. Tesla has decisively surpassed ExxonMobil today. Will post final mkt cap numbers at closing prices.

 

[pz1975]

To put this in perspective, about 1 year ago Exxon had a market cap of $320 billion while Tesla had a market cap of $40 billion. From 8x lower to surpassing it in 1 year - pretty impressive.

 

[jhm]

Oil major Shell to write down up to $22 billion of assets in second quarter

There are some interesting detail in this.

$8B to $9B of the total $15B to $22B impairment is Shell's gas business. This reinforces the view that venturing into big gas investments was a miscalibration for big oil.

Shell use to think Brent would stay around $60/b. Now they expect Brent to average $35 in 2020, $40 in 2021 and $50 in 2022.

Likewise they see Henry Hub gas prices averaging at $1.75/MMBtu in 2020, $2.50 in 2021, and $2.75 in 2023 (?).

I think they are still too optimistic about gas and probably too optimistic about Brent returning to $50 in 2022. The last oil glut took 3 years to recover, while batteries and EVs were at a substantially smaller scale. The Chinese SPR was also at a much smaller scale. Additionally we are not yet out of the woods with respect to Covid-19. Globally, there are about 160k new covid case each day. Anyone want to predict where it will be in 12 months?

Of course, it is more costly for Shell to change their assumptions about future prices than it is for me to opine. The lower their assumptions go, the more of their assets they must impair. I just think we haven't seen an end to how much will be written down before fuel prices recover.

 

[jhm]

Seen this before:
Fossil Fuels Make Up 84 Percent Of The Global Energy Market | OilPrice.com

If only fossil fuels made up 84% of the value of the global energy market as well. That's the thing I consistently find missing in arguments like these. Yes, fossil fuels will be part of our life, probably for a few decades to come.

But the valuation of the industry is about to plummet as it transforms from the growth business that powers modern society, to the dividend generating business that is permanently shrinking.

Unit volumes = good; market cap = bad.


If only these articles would make the second point as well. And it's not just journalists.

Here's my smart-ass reply to oilprice on this article:

Apparently the cost of maintaining a 84% share of primary energy is fuel prices so low that no one turns a profit. LNG at $2/MMBtu in Asia, are you kidding me? What a massive waste of good capital!

We should be asking the question how much market share should fossil fuel concede to renewable energy for fossil fuels to be worth investing in.

What I'm doing is pointing out how the fossil fuel market share is actually a bad thing. Big market share is a bad thing when you are unprofitable and destroying capital.

The fossil fuel industry like to pride itself in how big it is, but in reality it is presently at a diseconomy of scale. The attempt to throw capital at gas/LNG and petrochem shows that the industry can't just invest it's way out of this.

Let's play this forward. Renewables are now about 5% market share. They can easily double in 3 to 4 years. To slow it down to 4 years to doubling fossil fuels would have to remain painfully cheap. So let's say fossil investors wish to not destroy their own capital and allow renewables to double in 3 years. So market share for fossils drops from 84% to 79% by 2022. But this is on a primary energy market that grew 1.3% last year and 2.8% in 2018. Let's say the market grows 2%/y over the next three years. So 79%*1.02^2 / 84% = 0.998. That is, fossils fuel experience 0% growth over the next three years. This means fossil fuel demand peaks before 2022.

Actually, the growth in 2018 was fluke the ten years before that had 1.5% CAGR. Assuming that growth rate, fossil consumption declines 1.66% over the next 3 years if renewables double by 2022, or fossils have 0% growth over the 4 years if renewables take 4 years to double. So either way fossil consumption peaks by 2022. The only question is whether fossil will persist in destroying capital through the peak or exercise financial discipline.

My argument is that the fossil industries need to concede at least 5 points of market share by 2022 if they want to be profitable. Of course, I have no expectation that financial discipline will prevail anytime soon. As Cramer said, "Oil is tobacco."

 

[TheTalkingMule]

There are some interesting detail in this.

$8B to $9B of the total $15B to $22B impairment is Shell's gas business. This reinforces the view that venturing into big gas investments was a miscalibration for big oil.

Shell use to think Brent would stay around $60/b. Now they expect Brent to average $35 in 2020, $40 in 2021 and $50 in 2022.

Likewise they see Henry Hub gas prices averaging at $1.75/MMBtu in 2020, $2.50 in 2021, and $2.75 in 2023 (?).

I think they are still too optimistic about gas and probably too optimistic about Brent returning to $50 in 2022. The last oil glut took 3 years to recover, while batteries and EVs were at a substantially smaller scale. The Chinese SPR was also at a much smaller scale. Additionally we are not yet out of the woods with respect to Covid-19. Globally, there are about 160k new covid case each day. Anyone want to predict where it will be in 12 months?

Of course, it is more costly for Shell to change their assumptions about future prices than it is for me to opine. The lower their assumptions go, the more of their assets they must impair. I just think we haven't seen an end to how much will be written down before fuel prices recover.

I wonder what this means for the new cracker plant in Western PA? This is the signature jobs deal from our supposedly blue Dem Governor Tom Wolf, so I assume it keep moving. Wonder how much legit interest Shell has now? Does it need to be sold? Would anyone buy it? What a hot mess PA has become.

From mid-March....

Shell to temporarily suspend construction at ethane cracker plant after days of pressure amid COVID-19