Shorting Oil, Hedging Tesla

[ItsNotAboutTheMoney]

US crude supplies now down 7M barrels on domestic production of 11Mb/d. How is this physically possible?

Anyone have reliable estimates of demand right now in the US? Gasoline must be off by 20% or more and crude a similar amount.

Where on Earth are we putting all this crude if production is flat?

Gasoline demand:
2019 week to 8/2/2019: 9.651 Mbbl/day
2020 week to 7/31/2020: 8.617 Mbbl/day
8.617 / 9.651 = 89.3%.

 

[adiggs]

Here's how big oil keeps itself alive:
Big Oil’s Most Profitable Business Is No Longer Oil | OilPrice.com

Pumping crude is nice, but trading profits - that's some serious money. Cuz this is sustainable

 

[ammulder]

Pumping crude is nice, but trading profits - that's some serious money. Cuz this is sustainable

Well, that’s not entirely fair. If bears can’t gripe that all Tesla’s profit comes from zev credits — because we say hey, it’s money on the table and it would be dumb not to take advantage... I think the same has to apply here. I can’t exactly conceive of how oil majors are making billions trading... but if I could, maybe I’d be doing it too!

 

[jhm]

Well, that’s not entirely fair. If bears can’t gripe that all Tesla’s profit comes from zev credits — because we say hey, it’s money on the table and it would be dumb not to take advantage... I think the same has to apply here. I can’t exactly conceive of how oil majors are making billions trading... but if I could, maybe I’d be doing it too!

It think much of trading profit stems from capital inefficiency. Oil & gas have ruined by poor capital allocation, specifically overinvestment in production. So it's a really positive sign if some in the business are starting to make trading profits from seizing the inefficiencies rather than making things worse.

 

[jhm]

Will Low Prices Save Long-Term Oil Demand? | OilPrice.com

You know the rule, if the title is a yes or no question, the answer is no.

Before Covid-19, this thread had pretty much landed on peak oil happening in range of 2023 to 2025. I still think that is correct in terms of longer-term drivers of demand erosion. But Covid-19 has given oil demand such a pounding, that it is quite possible that it can muster much of a peak before 2023 to 2025. I think it was hard for many to appreciate just how fragile oil demand had become. Many technologies have be eroding that demand for a long time. Covid-19 has exposed those fault lines.

 

[TheTalkingMule]

Gasoline demand:
2019 week to 8/2/2019: 9.651 Mbbl/day
2020 week to 7/31/2020: 8.617 Mbbl/day
8.617 / 9.651 = 89.3%.

Thanks! Saw this chart in an EIA facebook post almost immediate after I asked the question...

No idea when May and June figures willpop up, but it'll be interesting. Will dig around.

Am I the only human being following the EIA on facebook..........Perhaps.

 

[TheTalkingMule]

Interesting Bloomberg article on the April -$37 WTI action. Apparently a small group of drunks in London made $500M that day. Having read all this......I think I'm OK with that. They pushed the rules quite a bit and did a lot of the self-trading moves we so despise as TSLA investors, but that ain't against the regulations.

London Traders Hit $500 Million Jackpot When Oil Went Negative

London Traders Hit $500 Million Jackpot When Oil Went Negative

Vega’s jackpot, which hasn’t been previously reported, involved about a dozen traders aggressively selling oil in unison before the May West Texas Intermediate contract settled at 2:30 p.m. in New York, the people say. It’s a tactic Vega’s traders used regularly, according to another person familiar with the firm’s strategy, but that day its trading coincided with a period of unprecedented volatility, when demand for fuel was wiped out by the coronavirus pandemic, and storage space in Cushing, Okla., where buyers take physical delivery of WTI crude, had all but disappeared.

To understand how Vega wound up making so much money that day, it’s helpful to consider some of the idiosyncrasies of the oil market. Among the most popular ways to trade oil is Nymex’s WTI futures contract, which allows buyers and sellers to agree on a price for 1,000 barrels of light sweet crude for delivery at a future date. New contracts are released every month, and they settle at 2:30 p.m. on or near the 20th of the month.

Nymex also offers a corollary instrument called Trading at Settlement, or TAS, in which buyers and sellers agree to transact at whatever the settlement price turns out to be. The settlement price is based on a volume-weighted average of trades occurring in the two minutes before 2:30 p.m. While it might seem curious that anyone would agree to buy something without knowing the price, the TAS market is popular among exchange-traded funds and other funds whose mandate is to track the price of oil rather than to get the best deal. It was also central to Vega’s strategy.

These guys leveraged the ETF mechanism of buying contracts at market price to drive pricing so low. Anyone could have bought though, so to me it's not illegal manipulation. They just knew what they were doing and bought/sold in the market at the right times.

Great background to understand why this isn't happening repeatedly even though the same supply/demand mix exists(or is even worse). All that noise we heard about ETFs changing the way they roll contracts and that it might mean they don't follow WTI so well certainly makes sense now.

I wonder if recent ETF changes have created another exploitable leverage point? I'm sure the oil traders are out there looking for it right now. I also wonder if this makes it easier for the actual supply side market participants to push pricing up and keep it there? If ETF buyers are taking a more conservative angle when trying to mimic pricing, certainly that could provide false floor support if you twist it the right way.

 

[iPlug]

Thanks! Saw this chart in an EIA facebook post almost immediate after I asked the question...

No idea when May and June figures willpop up, but it'll be interesting. Will dig around.

Am I the only human being following the EIA on facebook..........Perhaps.

Hah, you are not alone. Follow them regularly but not on Facebook.

More recent data here:

Weekly U.S. Product Supplied of Petroleum Products (Thousand Barrels per Day)

Product Supplied Definition:
Approximately represents consumption of petroleum products because it measures the disappearance of these products from primary sources, i.e., refineries, natural gas processing plants, blending plants, pipelines, and bulk terminals. In general, product supplied of each product in any given period is computed as follows: field production, plus refinery production, plus imports, plus unaccounted for crude oil, (plus net receipts when calculated on a PAD District basis), minus stock change, minus crude oil losses, minus refinery inputs, minus exports.

 

[jhm]

BP To Sell Oil And Gas Assets Even If Prices Rebound | OilPrice.com

BP is increasing renewable energy investments 10-fold. Making decisions on basis of oil long-term price of $55/b. This led to write-downs. Even if assets increase in value should oil rise to $75 or high, they will sell the written-down assets in any case.

My wife, who is an auditor, tells me that once an asset has been written-down, its value on the books cannot be increased even if the marketable value is much higher. Of course, a company can sell a written-down asset an book a gain. So from a narrow accounting perspective, it need not mean much for BP to say they will sell impaired assets as that is the only way realize an improvement in the balance sheet. But in this case, I think BP is trying to send a bigger message than that.

 

[jhm]

Big Oil Has Spent Nearly A Billion Dollars On Trump's Reelection | OilPrice.com
Big oil might have a problem paying too much for assets. Just an observation.

 

[TheTalkingMule]

BP To Sell Oil And Gas Assets Even If Prices Rebound | OilPrice.com

BP is increasing renewable energy investments 10-fold. Making decisions on basis of oil long-term price of $55/b. This led to write-downs. Even if assets increase in value should oil rise to $75 or high, they will sell the written-down assets in any case.

My wife, who is an auditor, tells me that once an asset has been written-down, its value on the books cannot be increased even if the marketable value is much higher. Of course, a company can sell a written-down asset an book a gain. So from a narrow accounting perspective, it need not mean much for BP to say they will sell impaired assets as that is the only way realize an improvement in the balance sheet. But in this case, I think BP is trying to send a bigger message than that.

So in short....BP, the most indebted and teetering of oil majors, has said a bunch of stuff. On the back of that stuff said, it has accessed billions of dollars in green bonds and handed them to their long time oil investors(and themselves as executives).

 

[jhm]

XOM vs HASI, which is the be better buy for the savvy dividend investor?

P/E____________ 25.9 XOM, 29.2 HASI
Div yield________ 7.94% XOM, 3.69% HASI
Payout Div/EPS__ 2.07 XOM, 1.04 HASI
Div/Assets______ 4.03% XOM, 4.05% HASI
Div/Equity______ 7.60% XOM, 9.91% HASI
Debt/Equity_____ 0.892 XOM, 1.446 HASI

Here's the difference: HASI is a REIT that invests in renewable energy and other sustainability assets; XOM is an oil major hold mostly oil, gas and other fossil fuel assets.

XOM is paying out twice earnings in dividends. This is not sustainable. HASI as a REIT must pay out at least 95% earnings to avoid taxes. Paying out earnings is sustainable.

The dividends of both are about 4% of assets. But return on assets for XOM is recently only 2%, while HASI is 4%. HASI's assets mostly have lease or PPA contracts on them to assure stable return on assets, but XOM's fossil based assets depend heavily on the prices of oil, natural gas, and refined products. So return on assets is subject to substantial market risk. Fossil assets are at risk of losing substantial value, especially as globe transitions away from fossil fuels. HASI assets are much less at risk of write-downs, no meaningful climate change risk. XOM peers have posted massive write-downs recently, but XOM is resisting this.

The market prices earnings about the same. HASI P/E is slightly higher, and the stock price has grown 26%/year over the last 7 years. But the market under prices XOM's div. The yield on XOM is 7.9% compared to HASI at 3.7%.

From an dividend investor view point, XOM looks substantially overvalued for the massive asset risk that it carries. The dividend should be cut in half just to get into the ballpark of sustainability over the next 5 years. XOM's ROA is terrible just 2%, but bearing the burden of a 4% dividend. By comparison 4% ROA on renewable energy and sustainable infrastructure is rewarding and sustainable (both financially and environmentally). On an earnings basis, the market is paying a little more for HASI, but it looks worth it to have stock that can grow in value.

So this comparison is a bit tongue in cheek, but energy investors need to give this serious thought. Both companies are little more than a play on holding a portfolio of energy assets. So the quality of these assets should matter to income investors.

This comparison is also a sneaky way to ask the question should an oil major like XOM get into the kind of assets that HASI manages? It would appear that if the purpose of XOM is simply to deliver $15B each year, then replacing some their current assets with those that HASI would buy would only improve their ability to deliver that dividend. Right now, XOM could divest some of those assets and buy higher quality RE assets, but if they wait much longer, they risk writing them down and struggling to find willing buyers.

So should XOM replace their assets or what? Well there is a certain investment they could make to day in and asset that yeilds 8%. Yep, they could buy back their shares. Why invest in crummy oil&gas assets that with a 2% yield, when buying back shares could relieve them the difficulty of delivering an 8% dividend? I think XOM could do both: divest assets to buy back shares and replace with a smaller portfolio of higher quality assets. For example, buy back shares to a level that the same per share dividend requires just $10B (down from $15B) and support this with $250B of sustainability assets (down from $362B of unsustainable fossil assets). The earnings on this restructured company could still be $10B (4% of assets) which at the P/E ratio of HASI would yield a market cap $292B (up from $183B today). It is a supreme irony that Exxon, shrinking into a third smaller asset base of renewables, could increase its market cap 60%. But that is just how awful these fossil assets have become.

I think BP and few others may have figured this out. It may take the industry decades to replace fossil assets with renewable and sustainable assets. Step one, stop creating new fossil assets.

 

[jhm]

So in short....BP, the most indebted and teetering of oil majors, has said a bunch of stuff. On the back of that stuff said, it has accessed billions of dollars in green bonds and handed them to their long time oil investors(and themselves as executives).

Tell me about these green bonds.

 

[TheTalkingMule]

Tell me about these green bonds.

I have a buddy who tracks BP and he says they're essentially on the ropes. We all know the majors are(and have been) borrowing to pay massive dividends. BP's best hope is to raise their ESG rating enough to qualify for bonds associated with the covid recovery but tied to green initiatives.

Basically keep a straight face while acting like oil & gas will be modestly profitable for 15 more years and that you're sincerely interested in transitioning(with the help of tens of billions in govt bonds).

Expert Opinion: EU ploughs ahead with Green Deal despite CV-19

His theory, which makes a hell of a lot of sense to me, is that you can gague BP's level of financial desperation by how heavily they geeenwash themselves. This is their last hope for staying alive a few more years. Say anything to save the dividends.

I'm of the opinion that none of the oil majors will sincerely help speed the advent of the sustainable renewable economy because that ends their business. Simple. Just like Saudi Arabia has been getting press for their "world's largest solar array" for more than a decade now. No player from the finite energy world is in a rush to start the sustainable abundance world where they can maybe maybe make 1/10th the profits.

 

[Dr. J]

I'm of the opinion that none of the oil majors will sincerely help speed the advent of the sustainable renewable economy because that ends their business. Simple. Just like Saudi Arabia has been getting press for their "world's largest solar array" for more than a decade now. No player from the finite energy world is in a rush to start the sustainable abundance world where they can maybe maybe make 1/10th the profits.

Arguably the same issue with legacy automakers unwilling to transition to BEVs?

 

[renim]

Imgur

posting this here, (from autonomous progress thread)

point is, like the Russian coronavirus vaccine, this may not the autonomous vehicle we are looking for,
but for trucking, its no longer IF but WHEN, will autonomous vehicles transport goods (big diesel implications)

(that waymo has neither driver nor passenger, so its most relevant to trucking)

 

[SmartElectric]

Exclusive: How Venezuela lost three oil supertankers to its Chinese partner

China remains one of the main importers of Venezuelan crude, mostly by way of ship-to-ship transfers that make it appear as if the origin of the crude is Malaysia.

Reminds me of another product from South America ...

 

[jhm]

BP Set For Biggest Downsizing Of Its Office Space Ever | OilPrice.com

While BP is cutting 10,000 jobs, 15% of its workforce, it will also be shrinking its office space by half. Like other companies it is learning that office workers can work from home indefinitely.

While BP is on the ropes, as @TheTalkingMule points out, it is also responding to Covid-19 in ways that demonstrate why peak oil demand may never come back. Image what would happen to long term motor fuel and ICEV demand if half of workers now working from home never return to working in an office. Not only is there a savings on commuting, but there could be a fundamental reallocation of real estate in urban business districts. As office space is vacated for commercial use, some of it will get repurposed for residential. Thus for those who do return to working in office buildings, it becomes much cheaper to live next door and walk to work. This in turn reduces the commute and vehicle ownership of those who do continue to work in offices. Now it can take many years for this to play out, which is why it could become a durable headwind against demand for motor fuels and ICEVs ever returning to peak levels.

 

[mspohr]

BP Set For Biggest Downsizing Of Its Office Space Ever | OilPrice.com

While BP is cutting 10,000 jobs, 15% of its workforce, it will also be shrinking its office space by half. Like other companies it is learning that office workers can work from home indefinitely.

While BP is on the ropes, as @TheTalkingMule points out, it is also responding to Covid-19 in ways that demonstrate why peak oil demand may never come back. Image what would happen to long term motor fuel and ICEV demand if half of workers now working from home never return to working in an office. Not only is there a savings on commuting, but there could be a fundamental reallocation of real estate in urban business districts. As office space is vacated for commercial use, some of it will get repurposed for residential. Thus for those who do return to working in office buildings, it becomes much cheaper to live next door and walk to work. This in turn reduces the commute and vehicle ownership of those who do continue to work in offices. Now it can take many years for this to play out, which is why it could become a durable headwind against demand for motor fuels and ICEVs ever returning to peak levels.

Just an anecdote to confirm this... People are fleeing San Francisco and the close in suburbs since they no longer need to work in the city or Peninsula offices. Suburbs further out are seeing high demand for houses. I live at Lake Tahoe which is also experiencing an huge influx of people from the city. All of the housing inventory has been sold above asking price.

 

[jhm]

I have a buddy who tracks BP and he says they're essentially on the ropes. We all know the majors are(and have been) borrowing to pay massive dividends. BP's best hope is to raise their ESG rating enough to qualify for bonds associated with the covid recovery but tied to green initiatives.

Basically keep a straight face while acting like oil & gas will be modestly profitable for 15 more years and that you're sincerely interested in transitioning(with the help of tens of billions in govt bonds).

Expert Opinion: EU ploughs ahead with Green Deal despite CV-19

His theory, which makes a hell of a lot of sense to me, is that you can gague BP's level of financial desperation by how heavily they geeenwash themselves. This is their last hope for staying alive a few more years. Say anything to save the dividends.

I'm of the opinion that none of the oil majors will sincerely help speed the advent of the sustainable renewable economy because that ends their business. Simple. Just like Saudi Arabia has been getting press for their "world's largest solar array" for more than a decade now. No player from the finite energy world is in a rush to start the sustainable abundance world where they can maybe maybe make 1/10th the profits.

Thanks! This is helpful. Oil & gas companies are going through a crisis with existential risk. This can also be a transformative period. We have discussed before how the cost of capital for FF projects has become substantially higher than that for renewable projects. This is essential to the impact of ESG and green investing. So I would not fault an oil company discovering that if they want capital to support their dividend, they've got to switch over to renewables.

In this past I would have shared your concern about oil companies avoiding renewables to protect demand for fossil fuels. But I think the Covid-19 crisis has revealed just how shaky that sort of reasoning has become. The big risk to fossil fuel producers is everybody and their cousin producing too damn much of it. Renewables don't really face that problem because they tend to lock in long-term demand contractually with each project. Avoiding RE to protect FF demand is simply not working. Meanwhile, investing too little in RE is depriving oil companies access to cheaper capital and better performing financial assets, which would go a long way to shoring up dividends.

At this point, what I would recommend to oil companies is that they need to base their dividends on renewable assets. Borrowing capital to pay dividends on a stock with 8% yield (ala XOM) is just plain dumb, value destroying. Here's what I would recommend.

• Cut dividend to payout only earnings from sustainable RE assets.
• Borrow money money only to develop sustainable RE assets or to buy back shares.
• Use earnings from non-sustainable FF assets to fund development of RE assets, to buy back shares or to reinvest FF assets mostly to preserve that value of existing asset portfolio.
• Divest stranded or nearly stranded assets.

The basic idea here is to do an overhaul of the balance sheet as quickly and economically as possible. There is limited scope for some reinvestment in FF so as to preserve the economic value of existing assets until they can be be replaced with sustainable assets. When dividends are based only on the sustainable assets, it assures investors that the dividends are likewise sustainable. The sustainable dividend per share is increased progressively by both investing in more RE assets and through stock buy-back. This should wean investors off the idea that their dividends depend on the continuation of FF investments. Under this scheme they do not. Rather the value of the FF assets is that they will be run-off or divested so as to be replaced with sustainable assets. The only reason the company should want to preserve the value of these assets is so that they can ultimately be exchanged for better assets.

I think if the oil majors all took this sort of approach we would see excess investment in FF dry up quickly. This in turn would preserve the value of existing FF assets and minimize write-downs. National oil companies are in a much more dire situation since national economies tend to depend critically on NOC revenues. So I'm not at all worried that global investments in oil and gas will fall off so fast as to create economic problems for the global economy. The big oil companies do the global economy a big favor by cutting fossil investments as quickly as possible. Returning capital to investors and reinvesting in sustainable assets are the only two outs that I see.

To be sure, I do not believe that oil and gas companies are necessary for the world to have sufficient investment in sustainable/RE assets. Plenty of other companies are already competing adequately in these spaces. But oil & gas companies for their own sake need to transition from fossils to something sustainable if they are to have any meaningful future. The situation is the same for ICE makers. The world does not need ICE makers to supply EVs. (New EV companies are springing up to seize the EV future.) But ICE makers must transition to EVs if they want to survive the next decade.

I would also point out that from an environmental point of view, it is not optimal for oil & gas companies to go bankrupt after decades of over-investment in fossils. This may be the path of certain dimwitted, knuckle-dragging fossil companies. But when these companies go bankrupt, the assets wind up in the hands of other, but at much lower cost. So the environmental damage continues and is made worse because it undermines the value of renewable energy. So it is much, much better for the climate if oil and gas companies avoid over-investing in fossil assets in the first place. So if BP can take a green bond lifeline and learn that it is much more rewarding to invest in RE than FF, this can help avoid flooding the world with cheap oil and gas that should never have been unearthed.