Shorting Oil, Hedging Tesla

[jhm]

Last couple weeks we saw some pretty powerful headlines about "massive crude supply draws" and "dramatically tightening domestic supplies". I'll wager we don't hear much today on a weekly EIA report documenting a crude/products supply build of 10M+ barrels. Never mind that brings supplies right back to where they were at the beginning of the month.

These clowns are playing a very temporary(and somewhat intentional) logistics logjam to boost futures prices pretending we're moving into some kind of long duration tight market. By Thanksgiving we'll be drowning in crude, by St Paddy's Day the frackers will be filling these $65-75 contracts with no end consumer to buy the products.

No idea how to play this rollercoaster, but we should start thinking about it. Volatility in the "energy world" is about to get far crazier than anything we've seen from TSLA over the last bunch of years. My first bet would be multiple "accidental" refinery explosions and shut downs in February.

I think the O&G industry believes it can leverage price volatility as a way to frighten politicians away from climate action. They are constantly grasping at relevance. If they can't get politicians to do their political will, they will wreak havoc on the economy and blame it all on climate policies. This is why there should be no appeasement with fossil fuel industries. The sooner we turn the corner and all fossil fuels go into terminal decline, the sooner we get past the point were they can harm the economy with these games. Ultimately, it is the volatility of fossil fuels that drives deep decarbonization.

Imagine being an RE producer in Europe right now. You've got practically zero marginal cost, but the nat gas industry has gas so jacked up that even ammonia producers have to idle their factories. RE is making money hand over fist. Moreover, suppose you want to develop a plant that uses cheap power to generate hydrogen and ammonia. The old complaint is that natural gas is so cheep power-to-ammonia can't compete. We'll what if natural gas is only seasonally cheap, and 25% of the year a gas-to-ammonia producer has to idle production. Suddenly, running an electrolyzer at about 50% capacity factor and ammonia 75% capacity factor is not such a big disadvantage on the capex side. The more annual volatility there is in gas prices, the more competitive electrolysis becomes. So we desperately need a huge electrolyzer fleet for decarbonization. Gas to hydrogen looks like an impossibly cheaper competitor to electrolyzers until gas prices in Europe and Asia spend a significant number of months per year with gas prices over $20/mmBtu.

Basically, if the gas market can't keep the price of gas low around the world and throughout the year, deep decarbonization will step in to take market share. The volatility game will be the undoing of the global gas market.

 

[petit_bateau]

Natural gas works fine as a bridge fuel if (gas) storage is properly priced. But it isn't.

 

[petit_bateau]

Sorry, just seen your latest post. Believe me the marginal cost of extra gas in Europe is not near zero. In order to produce more gas right now, then as the old joke goes "you should have invested $m a few years back". I've run O&G fields in Europe and elsewhere, and cheap to run they are not.

 

[adiggs]

With oil at such a high price, I keep expecting that to be priced into the CVX share price. As best as I can tell its made no difference whatsoever. Maybe the people that would invest in the company by buying the shares know something that hasn't percolated into the media yet.

I only mention CVX as that's who I use as my proxy for the oil market. I think that if shares were back up to $120 and probably above that (a multi-year high point), that's when I would consider purchasing some longest dated put options. In the meantime though that price may never be seen again and I'll just watch from the sidelines.

 

[jhm]

Natural gas works fine as a bridge fuel if (gas) storage is properly priced. But it isn't.

Right. Would you happen to know if carbon taxes are payable before or as gas is injected into storage or when it is withdrawn. I do think there is a case for deferring the tax until it is withdrawn, so that the tax does not become part of the cost to carry.

 

[petit_bateau]

Right. Would you happen to know if carbon taxes are payable before or as gas is injected into storage or when it is withdrawn. I do think there is a case for deferring the tax until it is withdrawn, so that the tax does not become part of the cost to carry.

Sorry jhm but I don't know that nuance in the EU ETS. I could look, but I'd be using Google just like you. But I've done enough O&G economics over the years to knnow it won't make a material difference (though similar regs can turn battery investment decisions, I think FEC or ERCOT have a similar rule re batteries though again I cannot recall the nuance).

What I mean re (gas) storage is that firstly you have to look at the volume/rate/duration parameters, just as one has to do with electrical storage (primarily pump store hydro, increasingly becoming battery storage). Then you have to look at the overall gas energy system and how it compares in each of those respects (e.g. is there linepack; are there any high potential fields with spare capacity; etc). They you have to look at each parent corporation's asset mix and corporate structure; then you have to look at what the allowable regulated return on any gas storage element is. When you do all that what you will discover is that the EU ETS is not the real issue, but that the real issue is the assumptions that drive the regulated asset base, which in turn reveal a disconnect between the real (physical) world and the assumed political/economic world. So each regulatory zone ends up with less storage than is appropriate, and each storage operator is incentivised to underfill it most of the time. This reflects that UK/EU typically had a lot of excess gas production capacity on tap so undervalued storage, but no longer does (and likely will never have again); but the regulators/politicians have yet to prioritise building the compensating gas storage as that is a cost. So in the meantime risk is being taken, and Lady Luck is now doing her thing. (and UK is the most complacent in this respect + Brexit*)

Basically a lot of your points are correct, and I'm not agin much of your sentiment, but not everything.

* all of the petrol (gasoline/diesel) stations in my UK town, and most of my UK county, are completely out of stock (my GF was on the phone earlier) - like in much of the UK. Nada. These complacencies are not restricted to the natural gas system. Meanwhile continental EU is absolutely fine as I can see with my own eyes where I am now. As usual complacency in energy matters has a habit of biting the incompetents hard.

 

[jhm]

Sorry, just seen your latest post. Believe me the marginal cost of extra gas in Europe is not near zero. In order to produce more gas right now, then as the old joke goes "you should have invested $m a few years back". I've run O&G fields in Europe and elsewhere, and cheap to run they are not.

Is gas produced in Europe cost competitive with importing LNG? If it is not, then it makes sense for Europe to become more dependent on LNG imports. But if too much of the global economy is relying on the global LNG supply, there may not be enough slack LNG capacity to handle a global shortage.

It's curious that Alberta gas is at $2.48/mmBtu while Henry Hub is at $5.48/mmBtu. Apparently, North America gas production could support more LNG export capacity. I was pretty critical of building out this capacity a few years back. But if domestic gas is getting priced out of Europe and Europe becoming more dependent on LNG imports, then this is a global economic risk that needs more attention. The global LNG market is just not as mature and robust as we might wish it to be.

 

[jhm]

Sorry jhm but I don't know that nuance in the EU ETS. I could look, but I'd be using Google just like you. But I've done enough O&G economics over the years to knnow it won't make a material difference (though similar regs can turn battery investment decisions, I think FEC or ERCOT have a similar rule re batteries though again I cannot recall the nuance).

What I mean re (gas) storage is that firstly you have to look at the volume/rate/duration parameters, just as one has to do with electrical storage (primarily pump store hydro, increasingly becoming battery storage). Then you have to look at the overall gas energy system and how it compares in each of those respects (e.g. is there linepack; are there any high potential fields with spare capacity; etc). They you have to look at each parent corporation's asset mix and corporate structure; then you have to look at what the allowable regulated return on any gas storage element is. When you do all that what you will discover is that the EU ETS is not the real issue, but that the real issue is the assumptions that drive the regulated asset base, which in turn reveal a disconnect between the real (physical) world and the assumed political/economic world. So each regulatory zone ends up with less storage than is appropriate, and each storage operator is incentivised to underfill it most of the time. This reflects that UK/EU typically had a lot of excess gas production capacity on tap so undervalued storage, but no longer does (and likely will never have again); but the regulators/politicians have yet to prioritise building the compensating gas storage as that is a cost. So in the meantime risk is being taken, and Lady Luck is now doing her thing. (and UK is the most complacent in this respect + Brexit*)

Basically a lot of your points are correct, and I'm not agin much of your sentiment, but not everything.

* all of the petrol (gasoline/diesel) stations in my UK town, and most of my UK county, are completely out of stock (my GF was on the phone earlier) - like in much of the UK. Nada. These complacencies are not restricted to the natural gas system. Meanwhile continental EU is absolutely fine as I can see with my own eyes where I am now. As usual complacency in energy matters has a habit of biting the incompetents hard.

Very helpful information. Thanks!

 

[TheTalkingMule]

With oil at such a high price, I keep expecting that to be priced into the CVX share price. As best as I can tell its made no difference whatsoever. Maybe the people that would invest in the company by buying the shares know something that hasn't percolated into the media yet.

I only mention CVX as that's who I use as my proxy for the oil market. I think that if shares were back up to $120 and probably above that (a multi-year high point), that's when I would consider purchasing some longest dated put options. In the meantime though that price may never be seen again and I'll just watch from the sidelines.

I've been keeping a close eye on long CVX puts and they're not even back to where they were in June. Certainly the big boys know the bottom is going to fall out at some point, because rationally CVX should be teetering around $120 as you say. Maybe it's that line of thinking, maybe it's them waiting to see if the Biden agenda goes thru.

We can probably sit tight and watch it slowly wind upwards as profits recover. I'm buying longest puts possible with the idea of buying more and more over the next couple years. Very small part of my mostly TSLA portfolio that will only grow significant if I'm still buying in 2024.

January 2024 options came out a few weeks back and the bid/ask spreads are just now beginning to narrow, but not really at the low strikes I want. $60p sits at $2.09/$4.30, and the options only go down to $47.5 strikes. If CVX can inch up toward $120 this fall, I'll be buying $70p Jan2024's at $4.20 and be quite happy.

 

[petit_bateau]

Is gas produced in Europe cost competitive with importing LNG? If it is not, then it makes sense for Europe to become more dependent on LNG imports. But if too much of the global economy is relying on the global LNG supply, there may not be enough slack LNG capacity to handle a global shortage.

It's curious that Alberta gas is at $2.48/mmBtu while Henry Hub is at $5.48/mmBtu. Apparently, North America gas production could support more LNG export capacity. I was pretty critical of building out this capacity a few years back. But if domestic gas is getting priced out of Europe and Europe becoming more dependent on LNG imports, then this is a global economic risk that needs more attention. The global LNG market is just not as mature and robust as we might wish it to be.

Yes existing domestic European gas is cost-competitive with imported gas, whether LNG or pipeline (primarily Russia). However domestic volumes are fading as the bigger fields reach end of life, and the prospectivity is not there for economic replacement. For example Brents, Groningen, etc are all going off-line. And shale prospectivity is not there, the equivalents of the US shale acreages are not viable in Europe at the necessary scale.

If one were to fully-cost US shale production including proper financing costs then I think you'd find that it is not that attractive for the export market. You can say the same about the Argentine (Vaca Muerta) shale plays, or the corresponding Chinese ones, which is why neither play is economically viable. Only in the US have the necessary conditions come together (geological, industry, regulatory, financial, scale).

Getting through FID Final Investment DEcision on new LNG plants & fields these days is becoming increasingly problematic.

Personally I think that instead of a continued long-term bridge fuel using gas with large scae gas investment, what we will now see is a fast transition using all legacy fuels that are now in the stranded asset base and minor additions.

All imho.

 

[jhm]

Yes existing domestic European gas is cost-competitive with imported gas, whether LNG or pipeline (primarily Russia). However domestic volumes are fading as the bigger fields reach end of life, and the prospectivity is not there for economic replacement. For example Brents, Groningen, etc are all going off-line. And shale prospectivity is not there, the equivalents of the US shale acreages are not viable in Europe at the necessary scale.

If one were to fully-cost US shale production including proper financing costs then I think you'd find that it is not that attractive for the export market. You can say the same about the Argentine (Vaca Muerta) shale plays, or the corresponding Chinese ones, which is why neither play is economically viable. Only in the US have the necessary conditions come together (geological, industry, regulatory, financial, scale).

Getting through FID Final Investment DEcision on new LNG plants & fields these days is becoming increasingly problematic.

Personally I think that instead of a continued long-term bridge fuel using gas with large scae gas investment, what we will now see is a fast transition using all legacy fuels that are now in the stranded asset base and minor additions.

All imho.

Thanks! Your commentary on prospectivity reminds me of analysis Harry Benham has done. He argues that the cost of continued expansion of oil production is much more expensive than merely maintaining existing fields. Certainly the aggregate risk of stranded assets goes up with the attempt to keep growing production. But I think there is a more immediate argument about the near term costs. That is, if we can ramp up renewables fast enough to satisfy incremental demand for energy, this could keep the cost cost of fossil fuels down to prices that are sufficient to maintain existing fields but not so high as to motivate expansion into new field. This economizes the value of fossil fuels through the transition and minimizes the risk of stranded assets.

We certainly don't want to see Europe go through an economic downturn for want of affordable gas. But making massive investments into new gas fields and LNG infrastructure is not necessarily the best economic path forward. For example, some have complained that wind generation has been around 90% of expected for a while. Yes, this could happen again in coming years. So why not attempt to add another 12% to wind capacity and beef up the transmission infrastructure before it happens again? Europe has to add this much eventually, so the only question is accelerating the pace. At a faster pace, existing domestic production of gas becomes more adequate to address residual needs and investments to increase import capacity can be avoided.

I don't know if European policy has any mechanism to accelerate wind, solar, transmission, and storage projects in response to anticipated risk of energy shortfalls. For example, you could have incremental incentives for completion of projects whenever gas reserves are critically low. Analogously, O&G developers keep an inventory of DUC wells that can be quickly completed when supplies become tight. The RE industry needs something comparable to that, project that are pre-approved, started, and can be completed quickly in response to a tight gas market. Market price signals might not be strong enough to move RE developers to this sort of stance, it could be a place where those carbon tax revenues could be deployed to safeguard against the sort of scenario now playing out. If wind developers knew they could get a bounty of say 500 euro/kW installations completed whenever gas reserves were at insufficient levels, they could find the extra capital to maintain reserve of incomplete and marginally profitable projects. This might even put pressure on the gas industry not to allow reserves to drop too low, lest they create incentives for more accelerated competition from RE. Regardless, wind developers in Europe should be racing all out to bring needed capacity to market right now while the economy hangs in the balance.

 

[jhm]

Billionaire Oil Trading Veteran Bets Big On Batteries | OilPrice.com

Billionaire Alex Beard, who retired as head of worldwide oil operations at commodities and mining giant Glencore two years ago, has set his sights on the battery storage market in the UK

oilprice.com

Barrels to batteries, some oil investors will make the transition.

 

[petit_bateau]

Thanks! Your commentary on prospectivity reminds me of analysis Harry Benham has done. He argues that the cost of continued expansion of oil production is much more expensive than merely maintaining existing fields. Certainly the aggregate risk of stranded assets goes up with the attempt to keep growing production. But I think there is a more immediate argument about the near term costs. That is, if we can ramp up renewables fast enough to satisfy incremental demand for energy, this could keep the cost cost of fossil fuels down to prices that are sufficient to maintain existing fields but not so high as to motivate expansion into new field. This economizes the value of fossil fuels through the transition and minimizes the risk of stranded assets.

We certainly don't want to see Europe go through an economic downturn for want of affordable gas. But making massive investments into new gas fields and LNG infrastructure is not necessarily the best economic path forward. For example, some have complained that wind generation has been around 90% of expected for a while. Yes, this could happen again in coming years. So why not attempt to add another 12% to wind capacity and beef up the transmission infrastructure before it happens again? Europe has to add this much eventually, so the only question is accelerating the pace. At a faster pace, existing domestic production of gas becomes more adequate to address residual needs and investments to increase import capacity can be avoided.

I don't know if European policy has any mechanism to accelerate wind, solar, transmission, and storage projects in response to anticipated risk of energy shortfalls. For example, you could have incremental incentives for completion of projects whenever gas reserves are critically low. Analogously, O&G developers keep an inventory of DUC wells that can be quickly completed when supplies become tight. The RE industry needs something comparable to that, project that are pre-approved, started, and can be completed quickly in response to a tight gas market. Market price signals might not be strong enough to move RE developers to this sort of stance, it could be a place where those carbon tax revenues could be deployed to safeguard against the sort of scenario now playing out. If wind developers knew they could get a bounty of say 500 euro/kW installations completed whenever gas reserves were at insufficient levels, they could find the extra capital to maintain reserve of incomplete and marginally profitable projects. This might even put pressure on the gas industry not to allow reserves to drop too low, lest they create incentives for more accelerated competition from RE. Regardless, wind developers in Europe should be racing all out to bring needed capacity to market right now while the economy hangs in the balance.

- Europe is making the transition faster than the US, faster than pretty much anywhere.
- Stuff in Europe is being built out pretty much as fast as is economic given the current fossil/renewable incentive mix.
- Just because levelised cost favours wind/solar doesn't mean that cash-up-front favours wind/solar, especially not when cost of providing for intermittency is factored in. Add in value of delay, and value of acceleration, and you'll pretty much get the European deployment model. The folk in the energy & finance ministries also do these sums and that very much informs the deployment rates and generation mixes that are in fact occurring.
- We in the industry know the probabilities. I've been running those weather numbers for nigh-on 20-years for system design (or operation) purposes, and I'm by far and away the only one. It is the politicians that don't want to understand in the West. This is not just a Europe thing, see ERCOT for similar in USA.
- DUC is only meaningful in the USA in the fracced fields. Everywhere else in the world (prob inc KSA these days) drilled stuff gets completed PDQ.
- My personal opinion is that the rate of renewables deployment, and the existing renewables stock, have now reached the scale where they are in fact impacting on fossil pricing. Ordinarily to suppress price spikes, though occasionally one gets through. The onging price spike would have been worse without renewables in the mix. I've done sums to show that it is now becoming material in that respect.
- I'm travelling for a few months. When I get back and have big screens again I'll try and dig out and update an old simple spreadsheet model that I once did for a global quick transition, as I think that is what the economics are in fact driving towards. This takes into account O&G depletion rates & fossil infrastructure useful life. Tickle me in December if I've not dug it out by then.

- As a by-the-way any of you who are interested in global energy news might want to subscribe to John Kemp Reuter's free daily emails. >> "IF YOU know anyone else who might like to receive best in energy and my research notes, they can add their emails to the circulation list using this link: http://eepurl.com/dxTcl1 "

 

[jhm]

- Europe is making the transition faster than the US, faster than pretty much anywhere.
- Stuff in Europe is being built out pretty much as fast as is economic given the current fossil/renewable incentive mix.
- Just because levelised cost favours wind/solar doesn't mean that cash-up-front favours wind/solar, especially not when cost of providing for intermittency is factored in. Add in value of delay, and value of acceleration, and you'll pretty much get the European deployment model. The folk in the energy & finance ministries also do these sums and that very much informs the deployment rates and generation mixes that are in fact occurring.
- We in the industry know the probabilities. I've been running those weather numbers for nigh-on 20-years for system design (or operation) purposes, and I'm by far and away the only one. It is the politicians that don't want to understand in the West. This is not just a Europe thing, see ERCOT for similar in USA.
- DUC is only meaningful in the USA in the fracced fields. Everywhere else in the world (prob inc KSA these days) drilled stuff gets completed PDQ.
- My personal opinion is that the rate of renewables deployment, and the existing renewables stock, have now reached the scale where they are in fact impacting on fossil pricing. Ordinarily to suppress price spikes, though occasionally one gets through. The onging price spike would have been worse without renewables in the mix. I've done sums to show that it is now becoming material in that respect.
- I'm travelling for a few months. When I get back and have big screens again I'll try and dig out and update an old simple spreadsheet model that I once did for a global quick transition, as I think that is what the economics are in fact driving towards. This takes into account O&G depletion rates & fossil infrastructure useful life. Tickle me in December if I've not dug it out by then.

- As a by-the-way any of you who are interested in global energy news might want to subscribe to John Kemp Reuter's free daily emails. >> "IF YOU know anyone else who might like to receive best in energy and my research notes, they can add their emails to the circulation list using this link: http://eepurl.com/dxTcl1 "

Very cool. I look forward from learn more from your perspective. It's especially heartening that you're seeing renewables at a scale where they impact fossil pricing. That is pretty significant. It also makes sense that with a recent transition to this scale, it becomes more difficult for the whole energy market to know how to balance everything. I envision a situation where there is a new or emerging equilibrium, but participants don't really have enough experience with that equilibrium to trust it and to invest around it. So it would make sense that the risk of underinvestment in gas or renewables or both could lead to a painful energy shortage situation.

I do think there is a case to be made in favor of subsidies for renewables over a tax on carbon. Subsidies run the risk of oversupply, while taxes run the risk of undersupply. These risks are not symmetric, and the externalities have huge differences. Undersupply damages the whole economy, while the economic shock of oversupply is more limited to investors and labor specifically within the energy industries. Taxpayers wind up footing more of the bill for transition that has lower impact on the whole economy. So I think there is a reasonable policy case for preferring to lean more on subsidizing RE than taxing fossils.

It looks like European oil majors seem favor this approach. They seems much more willing to make RE investments and subsidies can only sweeten the transition for them. Perhaps they have come to this more quickly than the American oil majors because in the US we have been too reluctant to push a carbon tax. That is, perhaps the carrot has been less than appealing for want of the stick.

Safe travels!

 

[mspohr]

Cathie Wood compares current crude market to whale oil, predicts it will meet the same fate

"If @ARKInvest's research is correct, oil prices will suffer the same fate as whale oil prices," Wood said in a tweet Thursday evening.

www.cnbc.com

Cathie Wood is calling for a drop in oil prices, likening the crude market to the extinction of whale oil in the early 1900s.

“The rise in oil prices this year is a function more of supply than demand. At the turn of the 20th century, whale oil faced the same fate and whale oil prices fluctuated dramatically. If @ARKInvest’s research is correct, oil prices will suffer the same fate as whale oil prices,” Wood said in a tweet Thursday evening.

 

[AndreP]

Back in May, Cathie said to expect a serious correction in commodity prices and that she would be "surprised" if oil hit $70 again

I have a feeling more surprises lay ahead

 

[jhm]

Cathie Wood compares current crude market to whale oil, predicts it will meet the same fate

"If @ARKInvest's research is correct, oil prices will suffer the same fate as whale oil prices," Wood said in a tweet Thursday evening.

www.cnbc.com

Cathie Wood is calling for a drop in oil prices, likening the crude market to the extinction of whale oil in the early 1900s.

“The rise in oil prices this year is a function more of supply than demand. At the turn of the 20th century, whale oil faced the same fate and whale oil prices fluctuated dramatically. If @ARKInvest’s research is correct, oil prices will suffer the same fate as whale oil prices,” Wood said in a tweet Thursday evening.

Ha! Very cheeky!

Meanwhile OPEC...

Meanwhile, OPEC said earlier this week that it thinks oil demand will continue to grow until 2035 even with cleaner energy sources as developing countries increase use of the fuel. OPEC then expects demand to plateau.

Ok, OPEC.

 

[jhm]

World’s Longest Sub-Sea Power Cable Begins Operations | OilPrice.com

The world’s longest sub-sea power cable linking the UK and Norway has begun commercial operations, allowing the two countries to share renewable energy

oilprice.com

This is very cool, a 1.4 GW cable that connects hydroelectric power in Norway to wind in the UK. Power can flow either way to supply UK grid or to store energy supplying Norwegian grid.

They say this is the longest cable, but Morocco may team up with UK to supply 3.6GW of solar, wind and battery stored power from Morocco. This very long cable will lie on the seabed west of Portugal and France from Morocco to the UK.

 

[mspohr]

World’s Longest Sub-Sea Power Cable Begins Operations | OilPrice.com

The world’s longest sub-sea power cable linking the UK and Norway has begun commercial operations, allowing the two countries to share renewable energy

oilprice.com

This is very cool, a 1.4 GW cable that connects hydroelectric power in Norway to wind in the UK. Power can flow either way to supply UK grid or to store energy supplying Norwegian grid.

They say this is the longest cable, but Morocco may team up with UK to supply 3.6GW of solar, wind and battery stored power from Morocco. This very long cable will lie on the seabed west of Portugal and France from Morocco to the UK.

Singapore is planning a cable for power from Australia

 

[petit_bateau]

World’s Longest Sub-Sea Power Cable Begins Operations | OilPrice.com

The world’s longest sub-sea power cable linking the UK and Norway has begun commercial operations, allowing the two countries to share renewable energy

oilprice.com

This is very cool, a 1.4 GW cable that connects hydroelectric power in Norway to wind in the UK. Power can flow either way to supply UK grid or to store energy supplying Norwegian grid.

They say this is the longest cable, but Morocco may team up with UK to supply 3.6GW of solar, wind and battery stored power from Morocco. This very long cable will lie on the seabed west of Portugal and France from Morocco to the UK.

Our (my company's) stuff is in that HV link system, and about a third of all the other big HV links around the world. Big grids are a part of the renewables/storage/grids solution. And that solution's value can only really be understood as an integrated whole. That is one reason the people trying to value storage in isolation are struggling. This is just as with big gas systems where one has to be able to rely on the production-transmission-distribution as a trinity.