Shorting Oil, Hedging Tesla

[mspohr]

Chinese progress on "green hydrogen"

We think electrolysers can get much cheaper much sooner than most expect,” said Kobad Bhavnagri, BloombergNEF’s Sydney-based global head of industrial decarbonisation.

“The way we see it is there is very little demand for hydrogen from fossil fuels with CCS. It doesn’t fit the scale-up model for an emerging industry.”

‘Green hydrogen’ from renewables could become cheapest ‘transformative fuel’ within a decade

 

[mspohr]

Op-ed: A $100 billion Big Oil divestiture plan is coming

• The largest oil and gas companies, including ExxonMobil, Royal Dutch Shell, Chevron and BP, are projected to sell a combined $100 billion in oil and gas assets around the world as they focus on top-performing regions, particularly the U.S. shale, according to a new analysis from consulting firm Rystad Energy.
• Climate change and renewable energy investments are forces that these Big Oil firms need to respond to strategically, but their own carbon divestiture campaigns will be motivated by factors distinct from the push from climate activists.

 

[TheTalkingMule]

The only way any existing shale investment shows profit is if we see multiple extended runs of WTI above $100. It's becoming more and more clear this is unlikely to happen even once, let alone 3 or 4 times in the next(last) 10 years of the traditional oil market.

The idea of somehow new investments being profitable is even more insane. Unless of course they just hyperconsolidate and the big boys pay essentially nothing to own the whole sector? Might happen, who knows. The cost of extraction is still far beyond any rational projection for WTI pricing the next 3 years.

Maybe these guys plan to consolidate now, then wait 3 years to make money when Tesla is pumping out 4M cars a year and the competition another 8-10M? Sound logic!

 

[dc_h]

Carbon capture is possible, but probably far more expensive than renewable energy sources. And since we don't have the political will to impose a zero-carbon mandate on the users of fossil fuels, it's pretty much a non-starter.

Carbon capture may make sense, but only after renewables have replaced most utility and transportation fossil fuel use.

 

[TheTalkingMule]

OPEC, in major shift, says oil demand to plateau in late 2030s

Didn't see that coming.

 

[adiggs]

OPEC, in major shift, says oil demand to plateau in late 2030s

Didn't see that coming.

I added to the Funny reactions, not because I think your post is funny, but because of the level of delusion I see coming from OPEC. Maybe with this report, we can conclude that the delusion is somewhat less. Except - isn't delusion more of a binary thing? OPEC thinks EVs will be 27% of the global vehicle market in 2045. Uhm .. wow?

The particular dynamic that I routinely don't see addressed by forecasts like this is the VALUE of the supplied product, not just the units or volume. If the units are exactly as they predict but selling for $10/bbl, then market measured in units is indeed flat to slightly up for several years, plateauing, and then coming back down. But the value of the product sales in that market is roughly 1/4th of today. Does the value prop in the oil market move from mining oil, to refining oil into usable products?

And is $10/bbl enough to maintain demand? What if maintaining the unit demand drives the price down to $5/bbl? With so many different producers with so many different motivations and cost structures can the $/bbl price be driven even lower?

And most importantly for the oil mining countries and companies - is the proper valuation of their operations under a $10/bbl circumstance at 1/4th of today's valuation, or is it even lower? The progression from the coal market suggests that no, the operations will not be valued at 1/4th of today's valuation (or, MHO, even close to that high).


I would dearly love to see some unit demand analysis and forecasting like this that also talks about the value of the units delivered, as well as the companies and countries providing oil as well.


I remember back in '12, '13, '14 kind of timeframe, a recurring theme on this board regarding what Tesla was doing with Model S was along the lines of "yes, the units are "small", but the demand measured in $$ was relatively huge". Units are important - that's where the learning comes from that reduces costs, but I think that the best measure of demand is units*price/unit. To this day I think that this is a big miss on the part of the media and many investors. I think that many of the competitors are at leasts subconsciously aware though, and this is what really freaks out the competition - Tesla is taking their most expensive / highest profit vehicle sales away as fast as Tesla can expand production.

 

[jhm]

The irony of OPEC projecting that peak demand is nearly 20 years away is that net demand for OPEC oil has already peaked. OPEC keeps cutting volume so as to keep price up, which in turn kills off demand net of non-OPEC production. So absolutely, the price of oil matters to the relevance of this demand forecast. When is OPEC going to accept lower prices so as to hold onto market share of the weak demand for oil?

 

[jhm]

What's with XOM share price going up lately?

 

[mspohr]

We're not dead yet!

The oil and gas industry is ‘not simply going to roll over’

Tyson Birchall, managing director of Longbow Capital, a Calgary based private equity manager, points out that even if the world is able to achieve the objectives of the Paris agreement, the oil and gas industry will still require investment of approximately $425 billion per year to meet demand as supply declines faster than demand does (he cites IEA reports).

“But what do business owners do?” Quoting famed investor Paul Tudor Jones, Birchall said they “adapt, evolve, compete or die. The oil and gas industry is going to keep going. It’s not simply going to roll over and it will invest in technology to be able to compete in a low-carbon world.”

This was a trend that was evident pre-Covid. Birchall noted that, “Covid hasn’t changed anything — it’s accelerated everything.”

 

[TheTalkingMule]

What's with XOM share price going up lately?

I assume this is traders just looking to play the "vaccine bounce". Same with Chevron climbing from a recent intraday $68 to $75+ recently.

Have some Jan2021 puts, but I'm looking to add Jan 2023 at prices that are starting to look very reasonable.

 

[jhm]

We're not dead yet!

The oil and gas industry is ‘not simply going to roll over’

Tyson Birchall, managing director of Longbow Capital, a Calgary based private equity manager, points out that even if the world is able to achieve the objectives of the Paris agreement, the oil and gas industry will still require investment of approximately $425 billion per year to meet demand as supply declines faster than demand does (he cites IEA reports).

“But what do business owners do?” Quoting famed investor Paul Tudor Jones, Birchall said they “adapt, evolve, compete or die. The oil and gas industry is going to keep going. It’s not simply going to roll over and it will invest in technology to be able to compete in a low-carbon world.”

This was a trend that was evident pre-Covid. Birchall noted that, “Covid hasn’t changed anything — it’s accelerated everything.”

I have a hard time believing oil and gas will need to sustain a $425B annual investment level. The industry has a tendency to exaggerate natural decline rates. Rarely do they discuss how decline rates depend on how fast production is growing. Some plays have higher than average decline rates and wells tend to decline faster in their earlier years than the later years. So if production growth rates switch to decline, it becomes possible for new capacity to come from plays with lower decline rates and for the mix of all wells to be more mature. So this means the average natural decline rate can shrink as production growth slips into decline.

The other problem of course is that cost of marginal production will also decline as the demand growth rate declines. This is an Econ 101 supply curve. Investment levels will fall in a nonlinear way. If new production capacity needs to fall say 25%, total investment levels will be much more than 25% less.

 

[jhm]

I assume this is traders just looking to play the "vaccine bounce". Same with Chevron climbing from a recent intraday $68 to $75+ recently.

Have some Jan2021 puts, but I'm looking to add Jan 2023 at prices that are starting to look very reasonable.

Wow, I would not invest in a vaccine bounce. Facial masks are about 80% effective, while the most imminent vaccine is maybe 50% effective. Worse yet half the public is afraid to use a rushed vaccine. So even if production and distribution posed no meaningful delay, the first vaccine only adds a small marginal improvement when added to existing mask wearing and social distancing. Bottom line for an oil investor, a vaccine will take to long and deliver too little relief from the pandemic to deliver much of a bump in oil demand. A price surge for oil company stock right now is likely premature.

 

[mspohr]

Wow, I would not invest in a vaccine bounce. Facial masks are about 80% effective, while the most imminent vaccine is maybe 50% effective. Worse yet half the public is afraid to use a rushed vaccine. So even if production and distribution posed no meaningful delay, the first vaccine only adds a small marginal improvement when added to existing mask wearing and social distancing. Bottom line for an oil investor, a vaccine will take to long and deliver too little relief from the pandemic to deliver much of a bump in oil demand. A price surge for oil company stock right now is likely premature.

Vaccine bounce is for the ignorant herd followers on Wall Street. They ignore the science.

 

[mspohr]

I have a hard time believing oil and gas will need to sustain a $425B annual investment level. The industry has a tendency to exaggerate natural decline rates. Rarely do they discuss how decline rates depend on how fast production is growing. Some plays have higher than average decline rates and wells tend to decline faster in their earlier years than the later years. So if production growth rates switch to decline, it becomes possible for new capacity to come from plays with lower decline rates and for the mix of all wells to be more mature. So this means the average natural decline rate can shrink as production growth slips into decline.

The other problem of course is that cost of marginal production will also decline as the demand growth rate declines. This is an Econ 101 supply curve. Investment levels will fall in a nonlinear way. If new production capacity needs to fall say 25%, total investment levels will be much more than 25% less.

Keep in mind that this was an oil person trying to drum up investors so he may have fudged the numbers.

 

[TheTalkingMule]

Vaccine bounce is for the ignorant herd followers on Wall Street. They ignore the science.

AKA....pretty much 90% of investors. I'm not implying there will be a bounce in demand, I'm saying that's the narrative they'll push and it will find plenty of receptive ears.

Hard to tell if the move is buying puts on this bump or wait a year or so til there's an actual economic rebound and a momentary shortfall in production. We might get a moment of higher WTI pricing 12-18 months from now if this is the start of sustained <$25-40 pricing, that could be the optimal moment for long term puts. Either way, I think it's safe to make the same bet 2 or 3 times over the next 18 months and you'll come out far ahead.

My focus remains on Chevron since they're the only major player that still has yet to revisit 1997 their SP. At $75, they're more than 2x 1997 share price. Meanwhile XOM is right about at theirs, BP is HALF their 1997 valuation. IMO none of these clowns have the cost basis to be considered safe, some just have further to fall than others when the bottom falls out.

Just checked my standing orders and I have CVX Jan2023's @ $50 strike set at $4.20, partially as a homage to TSLA and it may very well execute if SP crosses $85 on the "vaccine rebound".

 

[jhm]

Air Travel Collapse Makes Oil Hedges More Expensive | OilPrice.com

Airlines like to lock in low fuel prices. They are a big counterparty to oil producer looking to hedge against a decline in prices. Well, with Covid-19 causing air travel demand to crash, this is also reduces demand for oil futures.

 

[jhm]

Goldman Sachs: Biden Win Is Bullish For Oil | OilPrice.com

Oil & Gas industry finds a silver lining is the prospect of a Blue Wave.

 

[mspohr]

The Hill: Big Oil drives Trump's pandemic response | TheHill.
Big Oil drives Trump's pandemic response

Even before the crisis, oil and gas companies were shrinking, drowning in debt, and losing ground to renewables. But thanks to the U.S. government's emergency-funding largesse, oil companies may have found an escape from billions in debt coming due. This is another chapter in the hundred year history of oil and gas depending on taxpayer assistance.

Big Oil didn't just get a bailout - it got a lifeline to keep burning fossil fuels with impunity, pushing us closer to unfixable global warming. With wildfires raging across the American West, destroying communities, blocking out the sun, filling the air with illness-causing soot, and inflicting immense economic damage, why in the world is the Fed fueling climate catastrophe?

 

[TheTalkingMule]

I said several dozen pages back that it can't be a coincidence we've seen rates drop consistently through all this money printing......just at the time that fossil interests would crack if they went up 1%. This is the end folks! There is no BP, XOM, CVX once the 10yr ever goes back up to 3.5%!

Hard to believe is such a convenient and unprecedented coincidence. We're at the end of scarcity, but they're doing an admirable job of hanging on.

 

[jhm]

https://twitter.com/mckinnon_hannah/status/1315946353936207873?s=19

Nice, short Twitter thread on the compatibility of developing any new oil fields with at shot at 1.5 degree scenario. Here's the key graphic:

The tweet author added the red line for the Net Zero Emissions by 2050 (NZE2050) scenario. That scenario is plausibly consistent with 1.5C climate outcome.

Note that the NZE2050 scenario is right in line with limiting future oil investments to existing oil fields. Other scenarios SDS and STEPS call for new oil fields to be developed.

It is startling that we are at the precipice for no new oil fields. Any new investments in new fields will either lead stranded assets or climate change in excess of 1.5C.

We discussed how different levels of growth in oil production is non-linear. It used to be that every barrel produced called for a new barrel to be found so as to keep reserve levels up. This reserve replacement investment has not been necessary for quite a while. Now it turns out the investment in new fields, including infrastructure, is not needed. If this were heeded by the oil industry, the marginal barrel produced would be cheaper. Specifically the marginal barrel would not be burdened by the costs of developing a new field. And as the marginal cost falls, the price of oil is likely to fall.

The problem, of course, is that the oil industry will not heed the call to stop developing new fields. My hope is that the price of oil remains low enough that price alone will discourage investment in new fields. An excursion into higher prices could spur development of new fields leading to chronic oversupply or worse.