Shorting Oil, Hedging Tesla

[jhm]

Those odds look about right. I was thinking more like:

40%
1%
25%
25%
8%
1%
Same years.

Don't tell anyone tho, externally I'm quoting 2019 peak demand as 50/50.

Ironically, I think the stimulative nature of the energy transition ramping may get us a fresh peak in 2024.

Nice to see the countdown in it's final phase tho!

We're on the same page. You can still say that 2019 is your most likely peak year even if you place the probability at 40%.

Apparently you're more confident that 2022 will not be a new peak than me. My 7% is mostly a lack of certainty that it ain't gonna happen this year. What do you see going on that gives you more certainty than me?

 

[TheTalkingMule]

Apparently you're more confident that 2022 will not be a new peak than me. My 7% is mostly a lack of certainty that it ain't gonna happen this year. What do you see going on that gives you more certainty than me?

Fairly sure IEA has given up on 2022, so to me that crosses it off.

 

[adiggs]

Those odds look about right. I was thinking more like:

40%
1%
25%
25%
8%
1%
Same years.

Don't tell anyone tho, externally I'm quoting 2019 peak demand as 50/50.

Ironically, I think the stimulative nature of the energy transition ramping may get us a fresh peak in 2024.

Nice to see the countdown in it's final phase tho!

In both cases I believe you're talking about units peak, which is what we primarily care about in a climate change context.

Interesting to me is that with the high prices we may not have reached peak revenue (I don't have numbers to back me up on this, one way or another). Peak revenue due to high $/bbl prices looks like another headwind to boosting unit production - 10% more output for 30% less $$ looks like a losing proposition in the new world order of investment discipline and dividend focus for the industry. Keeping units the same or a bit more constrained to keep the $/bbl price relatively high looks like just the ticket though (to me, for the industry).


In other news, the 100 strike Jan '24 Chevron puts I purchased when shares were $172 are ahead about 25% (low 4's to mid 5's) with shares down $15 (nearly 10%). Not a big deal either way, but I like new positions moving in my favor more than new positions moving against me. Now I just want to see Chevron borrowing big money that they have little chance of investing to generate a meaningful return over an extended period. Something like that to crush the share price and send it back down to $100. Yeah - that'd be cool . Or maybe a big $$ acquisition at too high of a premium.

Or a collapse in the price of oil, but I see stronger motivation all around to keep supply constrained and prices high - at least for the next year (not so good for my Death to Oil short).

 

[Oil4AsphaultOnly]

McKinsey: Oil Demand Peak Could Be Two To Five Years Away | OilPrice.com

Slower demand for road transport could see oil demand peaking in the next two to five years, McKinsey & Company said in its new Global Energy Perspective 2022 report

oilprice.com

So McKinsey study (before Russia's invasion of Ukraine) finds that oil demand is waning due to EV adoption and will lead to a demand peak within a few years. Yep, what I've been saying for 5 years about a peak by 2025.

But in light of the war in Ukraine, I am revising my expectations. Oil demand has peaked at 100.21 mbpd in 2019, and I believe this peak will hold as the all time peak.

Consider that crude production peaked a year earlier in 2018. This was well before Covid-19 was an issue. Even before the war in Ukraine, the oil supply was so high that Brent has trembling above $80/b, high enough to degrade demand growth. And producers were not moving to ramp up production. Now the world will struggle to apply sanctions on Russian oil. This will keep the supply low and price high. Moreover, the political nature of sanction creates policy uncertainty for oil producers. They don't know how much Russian will be allowed to compete in the global market. This uncertainty can discourage aggressive investment in oil. Brent could remain above $100/b for several years.

Essentially, oil demand cannot reach a new peak until production reaches a new peak and oil prices fall below a certain price, maybe $60/b. Meanwhile, EV production is ramping at max speed. 2021 saw the sell of 6.6M EVs. At a mere 45% annual growth this surpasses 20M EVs in 2024. I believe EV growth will be strong enough that there very little chance of a new demand peak being set in 2025 or later.

So the question gets narrowed, can oil demand set a new peak in 2022, 2023 or 2024? Before the war, 2022 had a far shot at surpassing 100.21 mbpd, but it is now highly unlikely. 2024 will also be a hard year for a new peak because over 20M EV will hit the road. Any residual problems with supply and high oil prices will diminish the odds. So I think 2023 is Tha goldilocks year that has the best chance of setting a new peak. But this means that oil producers need to hussle this year to drive down oil prices next year. I'm not seeing this hassle, but the Russian oil sanctions are a lot to overcome.

The best way oil could reach a new peak in 2023 or 2024 comes down to one man. Putin would need to stop this foolishness and exit Ukraine on such good terms with the whole world that all nations are willing to drop all sanctions on Russian oil before 2023. Sadly, Putin is not morally or politically capable of making nice with Ukraine and the west. So I'm not worried that an outbreak of peace and harmony will threaten the world with a new peak of oil production and consumption.

So my friends, I belive that oil has likely peaked in 2019. I'd be interest in what other people think the chances are. For now my subjective probability for the peak year are as follows:

2019 50%
2022 7%
2023 20%
2024 15%
2025 7%
Later 1%

Looks like Neroden had the closest guess of peak demand (no one would've guessed the russia-ukraine war)

 

[jhm]

Looks like Neroden had the closest guess of peak demand (no one would've guessed the russia-ukraine war)

Remind me, what was his prediction?

 

[mspohr]

Looks like Neroden had the closest guess of peak demand (no one would've guessed the russia-ukraine war)

Nobody expects the Spanish Inquisition

 

[jhm]

In both cases I believe you're talking about units peak, which is what we primarily care about in a climate change context.

Interesting to me is that with the high prices we may not have reached peak revenue (I don't have numbers to back me up on this, one way or another). Peak revenue due to high $/bbl prices looks like another headwind to boosting unit production - 10% more output for 30% less $$ looks like a losing proposition in the new world order of investment discipline and dividend focus for the industry. Keeping units the same or a bit more constrained to keep the $/bbl price relatively high looks like just the ticket though (to me, for the industry).

Yeah, a few years back I had done an analysis on total value of crude (annual average Brent price * total volume crude). As I recall, there was a very clear peak several years back. It would be good to replicate that.

I think it does lend insight into the economics. Generally, we should expect the average cost per barrel to increase from year to year. So total revenue decline definitely implies lower cash flow for the industry. So the prospect for boosting production become increasingly narrow. Yeah, 10% output for 30% less return becomes not only painful but deeply irrational.

Over the years, we've discussed the interplay between peak oil demand and peak oil supply. It is possible that the industry has reached the point where the economics will no longer support pushing production to a new peak, even with Brent over $100/b! So it is just a matter of time, if there is no new production peak, there can be no new consumption peak. Sure, "demand" could rise to 105 mbpd if the price were $30/b, but that would imply a massive financial loss to producers!

If 2018 and 2019 do stand as peaks for supply and demand, respectively. I guess that will settle our debate about whether supply or demand peaks first. Cheers!

 

[Doggydogworld]

Fairly sure IEA has given up on 2022, so to me that crosses it off.

Yeah, 2022 has too much supply disruption and high prices to allow much growth. Plus we still have lockdowns. Shanghai alone is close to 1% of global GDP, and lockdowns may spread to other cities.

I've long said 2027 would be the oil demand peak, but in reality we'll plateau. Look at US electricity demand. It "peaked" in 2007 at 4.16 TWh. Then after some housing crash bobbles it flat-lined around 4.05 TWh for years. Suddenly in 2018 we set a new "peak" of 4.21 (includes 0.03 small scale solar).

Despite rising EV sales the global ICE fleet is still growing. Shrinkage in Europe is more than offset by strong growth in China and developing countries.

 

[TheTalkingMule]

Weekly EIA US Commercial Supplies update....

This strategic reserve trickle is working like a charm. "Commercial stockpile" up about a million barrels this week due to a less than 3Mb release from the SPR. That's not even half of what the WH threatened to release each day.

Total stockpiles(crude and refined products) were the same. Up about 1Mb, or down 2Mb if you count the SPR.

If they can manage to dump the whole 7Mb per week onto the market from the SPR, that should be the last straw that chops the legs out from under this trade.

It'll be interesting to see how much frackers will be pumping this summer now that the WH will let them drill in more places and workers may be coming back online. With all the talk of peak oil......they must know the clock is ticking. Not everyone's gonna survive this 2023/24 shakeout after futures crash, so it's every gal for herself this summer! Book those earnings while you can!

 

[Oil4AsphaultOnly]

Remind me, what was his prediction?

I think his was peak production in 2022-2023 due to demand destruction from EV's. I thought it would be 2021. But that was before covid, so nothing to be taken seriously.

 

[Doggydogworld]

I think his was peak production in 2022-2023 due to demand destruction from EV's. I thought it would be 2021. But that was before covid, so nothing to be taken seriously.

The long term trend for oil consumption is very roughly 1m bpd increase per year. Recessions (and Covid) cause declines, but it catches back up. It's almost entirely driven by the developing world, including China. US is flat, Europe and Japan on slow declines.

A long range US BEV like Model 3/Y displaces about 500 gallons/year. But not all BEVs can do long trips. And PHEVs (big in Europe) displace almost no oil on long trips. And the dominant EV markets are Europe and China, where annual mileage is lower and MPG is higher than the US. China's most popular BEV, the Hongguang Mini, probably displaces less than 200 gal/year.

Let's be generous say it averages out to 420 gal/year, or 10 bbl. To offset oil's 1m bpd long term growth trend we thus need to sell 100k EVs per day or 36.5 million annually. That's the peak.

 

[mspohr]

The long term trend for oil consumption is very roughly 1m bpd increase per year. Recessions (and Covid) cause declines, but it catches back up. It's almost entirely driven by the developing world, including China. US is flat, Europe and Japan on slow declines.

A long range US BEV like Model 3/Y displaces about 500 gallons/year. But not all BEVs can do long trips. And PHEVs (big in Europe) displace almost no oil on long trips. And the dominant EV markets are Europe and China, where annual mileage is lower and MPG is higher than the US. China's most popular BEV, the Hongguang Mini, probably displaces less than 200 gal/year.

Let's be generous say it averages out to 420 gal/year, or 10 bbl. To offset oil's 1m bpd long term growth trend we thus need to sell 100k EVs per day or 36.5 million annually. That's the peak.

Not sure that your assumption of 1 m bpd annual increase is sound. Oil consumption has been at less than 100 m bpd since 2019 so has really stopped increasing.
What would cause an increase in oil consumption? Certainly not the millions (10 million in 2021 and growing at exponentially at 100%-200% a year) of EVs being produced. These exert a compound downward force on oil consumption.
Why would oil consumption increase?

 

[Oil4AsphaultOnly]

The long term trend for oil consumption is very roughly 1m bpd increase per year. Recessions (and Covid) cause declines, but it catches back up. It's almost entirely driven by the developing world, including China. US is flat, Europe and Japan on slow declines.

A long range US BEV like Model 3/Y displaces about 500 gallons/year. But not all BEVs can do long trips. And PHEVs (big in Europe) displace almost no oil on long trips. And the dominant EV markets are Europe and China, where annual mileage is lower and MPG is higher than the US. China's most popular BEV, the Hongguang Mini, probably displaces less than 200 gal/year.

Let's be generous say it averages out to 420 gal/year, or 10 bbl. To offset oil's 1m bpd long term growth trend we thus need to sell 100k EVs per day or 36.5 million annually. That's the peak.

That can't be right, since most miles driven aren't long road trips. So you can't just focus on the amount of oil saved on long trips alone.

Also, the average american now drives ~14k miles per year (averaging 18 miles per gallon): https://www.thezebra.com/resources/driving/average-miles-driven-per-year/#infographic

So it's more like 835 gallons/yr saved for average US drivers.

Secondly, that growth estimate of 1m bpd was assuming that as more developing-countries modernize, and developed-country populations grow, there would be more drivers on the road, so vehicle growth would simply counter-act the reduction in consumption from more efficient cars (whether hybrids or EV's). What it doesn't account for is the fact that electrification removes the demand from the highest mileage drivers first, whether new or old, and that would have an outsized effect on demand for oil.

So the high mileage US drivers average 18k miles, or 1000 gals. So if you bring up the average global average (since most consumption is still in the US) to 630gal/year or 15bbl, the 1m bpd offset would be reached around 24 million EV's annually. China sold 2.9 million EV's in 2021 (and only 0.9 million in 2020). China's on track to peaking their own demand growth.

Although we're not there yet, we're not that far off from peak oil demand.

 

[TheTalkingMule]

How much gas is used on very long trips vs commuting, 1%? EVs displace the inefficiency of ICE cars idling and sitting in stop/start traffic every day.

Also consider the natural ramp in efficiency of the global vehicle fleet as low mpg ones are replaced with something twice as efficient.

Also consider the other sectors. 1% of all crude consumption in the world goes to air conditioning Saudi Arabia on certain days in the summer. They may be hesitant to replace that demand with solar, but everyone else is.

 

[Doggydogworld]

Not sure that your assumption of 1 m bpd annual increase is sound. Oil consumption has been at less than 100 m bpd since 2019 so has really stopped increasing.

Here's a graph going back to 1997. The trend actually stretches back decades earlier, e.g. 1987 consumption was ~63m bpd, but I can't easily find a longer term graph. There are interruptions, e.g. the 1979 "energy crisis" and ensuing price spike caused consumption to flatline for six years. And the 2007-08 financial crisis caused a small decline and COVID caused the mother of all declines. But these short term fluctuations do not alter the long term trend.

What would cause an increase in oil consumption? Certainly not the millions (10 million in 2021 and growing at exponentially at 100%-200% a year) of EVs being produced. These exert a compound downward force on oil consumption.

Why would oil consumption increase?

As I said, it's the developing world. They want to drive, like we do, instead of walk.

That can't be right, since most miles driven aren't long road trips. So you can't just focus on the amount of oil saved on long trips alone.

I'm not focusing on long trips alone. I'm simply saying a Model 3 AWD might displace all 500 gallons of a typical driver's consumption while a Mini Cooper with 120 mile range does not. Similarly, a Volt PHEV might only displace 400 gallons and a Prius Prime with 25 mile EV range even less. Europeans who average 9k miles/year in 45 mpg VW Golfs only displace 200 gallons/year by going electric.

Also, the average american now drives ~14k miles per year (averaging 18 miles per gallon): https://www.thezebra.com/resources/driving/average-miles-driven-per-year/#infographic

18 mpg is because they're driving giant SUVs and pickups. Model 3 replaces mid-sized sedans which get a lot better than 18 mpg. Heck, my minivan averages a lot better than 18 mpg and it's 10 years old.

So it's more like 835 gallons/yr saved for average US drivers.

The US has ~280 million vehicles and burns ~140 billion gallons of gas per year. So the average is 500 gallons, not 835. And it's only 500 if we replace big SUVs and pickups in equal proportion to sedans and small CUVs. Which we don't, by a long shot. And EVs tend to be "second cars", mostly used for local driving with a bigger ICE used for long trips. I know everyone here uses their Tesla for long trips, but nobody here is represents the mainstream.

So the high mileage US drivers average 18k miles, or 1000 gals. So if you bring up the average global average (since most consumption is still in the US) to 630gal/year or 15bbl, the 1m bpd offset would be reached around 24 million EV's annually. China sold 2.9 million EV's in 2021 (and only 0.9 million in 2020). China's on track to peaking their own demand growth.

You're torturing the numbers. There is no evidence the average US EV drives 18k miles per year, in fact quite the contrary. I've spent quite a bit of time looking at used EVs for sale and they almost always have far fewer miles than similar ICEVs of the same age. Furthermore, the US simply doesn't buy enough EVs to move the global needle.

How much gas is used on very long trips vs commuting, 1%?

It's far more than that. I drive 350 each way to see my daughter. When I lived in CA I'd drive 400 each way to go skiing or to Vegas. These are very common weekend trips. A few trips like this each year and you're at 2% of your "days" but 20% of your miles. This doesn't include 'very long trips', like the 2000+ mile round trip to go skiing in New Mexico or the 2500+ mile round trip to see relatives for Thanksgiving when my kids were younger. That's 20% of annual miles in less than a week.

EVs displace the inefficiency of ICE cars idling and sitting in stop/start traffic every day.

Already included.

Also consider the natural ramp in efficiency of the global vehicle fleet as low mpg ones are replaced with something twice as efficient.

Offset by growth in vehicle size.

Also consider the other sectors. 1% of all crude consumption in the world goes to air conditioning Saudi Arabia on certain days in the summer. They may be hesitant to replace that demand with solar, but everyone else is.

Again, the trend has been in place for decades despite continual improvement in efficiency. See: Paradox, Jevon's.

 

[mspohr]

As I said, it's the developing world. They want to drive, like we do, instead of walk.

They'll most likely be buying EVs from China.

Again, the trend has been in place for decades despite continual improvement in efficiency. See: Paradox, Jevon's.

RE: Jevon. In this case, the increased efficiency will be in substituting electricity for oil. We may consume more energy but it will be electric, not oil.

The trend in oil consumption will not continue. It has already stopped increasing. EVs and renewable energy will supplant oil. Oil had a good run, but it's over.

 

[Doggydogworld]

RE: Jevon. In this case, the increased efficiency will be in substituting electricity for oil. We may consume more energy but it will be electric, not oil.

The trend in oil consumption will not continue.

1m bpd/year is the underlying trend. EV sales last year were enough to convert ~160k bpd of that demand growth from oil to electricity. So without COVID & War oil demand would have grown 840k bpd instead of 1m.

This isn't "Yay oil, Boo EVs". It's just third grade arithmetic.

It has already stopped increasing. EVs and renewable energy will supplant oil. Oil had a good run, but it's over.

Don't confuse temporary disruptions with long term trends.

If you want a different result, change the approach. Sell BEVs exclusively to Taxi/Uber drivers. A BEV taxi (or robotaxi!) displaces 3000 gallons/year vs. 200-500. Or put our constrained battery supply into 4x as many PHEVs and reduce oil consumption 3x faster. Or just stay the course and accept that oil will peak around 2027.

 

[mspohr]

1m bpd/year is the underlying trend. EV sales last year were enough to convert ~160k bpd of that demand growth from oil to electricity. So without COVID & War oil demand would have grown 840k bpd instead of 1m.

This isn't "Yay oil, Boo EVs". It's just third grade arithmetic.


Don't confuse temporary disruptions with long term trends.

If you want a different result, change the approach. Sell BEVs exclusively to Taxi/Uber drivers. A BEV taxi (or robotaxi!) displaces 3000 gallons/year vs. 200-500. Or put our constrained battery supply into 4x as many PHEVs and reduce oil consumption 3x faster. Or just stay the course and accept that oil will peak around 2027.

Don't assume "long term trends" will continue forever... especially when it comes to commodities.
Oil peaked in 2019.

 

[TheTalkingMule]

Commercial crude inventories up again this week, due to a small 3Mb SPR release. Of course WTI is up 5% today. Because apparently Russia is going to stop selling oil.

This is getting old. MBS and the rest of the OPEC+ clowns must be rolling around on the floor laughing with joy.

 

[jhm]

The long term trend for oil consumption is very roughly 1m bpd increase per year. Recessions (and Covid) cause declines, but it catches back up. It's almost entirely driven by the developing world, including China. US is flat, Europe and Japan on slow declines.

A long range US BEV like Model 3/Y displaces about 500 gallons/year. But not all BEVs can do long trips. And PHEVs (big in Europe) displace almost no oil on long trips. And the dominant EV markets are Europe and China, where annual mileage is lower and MPG is higher than the US. China's most popular BEV, the Hongguang Mini, probably displaces less than 200 gal/year.

Let's be generous say it averages out to 420 gal/year, or 10 bbl. To offset oil's 1m bpd long term growth trend we thus need to sell 100k EVs per day or 36.5 million annually. That's the peak.

I use 30M EVs = 1 mbpd, or 1 barrel per month per car. I don't think the difference is enough to quibble about. Basically when EVs are growing more than 30% per year, if you're just a little short of thr peak one year, you're well past the peak the next year.

BTW I don't think the oil peak around EVs as a driver will be a plateau. This is especially true if EVs are growing more than 50%/year near the peak. Any peak, however, can be obscured by an abundance of noise. But when you look at the driver's of secular change and sort out temporal shocks like a Covid-19 event or a short-term glut, you can see that the ground beneath the noise has decisively shifted.

Put another way, it will have taken over 15 years for EVs to hit 30M/yr, but it will only take another 3 years or so to double that 60M/year. Whether the peak is at 30 or 40, the fall off past that point is much faster than anything we will have seen leading up that. So long as the annual growth of EVs remains high, post peak will be truly disruptive.

We'll see how this plays out in a couple of years.