Shorting Oil, Hedging Tesla

[adiggs]

As a followup - I bought CVX 100 strike puts, Jan '24, for $4 awhile back when CVX shares were in the low 170s. I felt that was a particularly high share price (you've got to expand the share price chart to a lot of years to find a previous ATH) and made a good short opportunity.

Today with the shares back in the 160s and enough news about short supplies and stuff, I decided to close for 4.45. Made about 10% over several months on a small and mostly whimsical position.


I'm still interested in shorting oil in particular, though I'll also continue to focus on shorting oil companies rather than oil itself. Buying puts in a company is something I understand - finding a mechanism I understand and trust to directly short oil is not something I understand (beyond understanding that I don't understand ).

Heck - maybe we'll go on a run and I'll be able to buy back in with Jan '25 puts.

 

[jhm]

https://twitter.com/x/status/1582378526099275779

The chart on the left is of particular interest. It suggests that at a national level the transit time from 10% EV market share to 90% could be as short as 8 years. This implies an average market shift of 10% points per year!

When we think about what this may mean for global EV uptake, we must recognize that different countries will start this 10% to 90% transition in different years, and Norway is already exiting it. Even so, the maximum annual global shift in EV market share is likely to happen as EVs hit 50% share. This peak global shift could be as high as 10%. For example, the global market could transit from 45% EV to 55% in the span of 12 months.

Another implication is that automakers looking to hold on to market share will need to be able to sustain a 10% annual product mix shift in their key markets. The automakers that have successfully hit the fit 10% mark appear to be able to do, so far. But the weaker competitor who are lagging behind may be in serious. Pretty much ever automaker (save Tesla and other 100% BEV makers already) need to take the view that BEVs must be 90% of their product mix in 8 years, 2030. Anything short of this breakneck pace will lead to massive loss of market share.

Demand for motor fuel is impacted by this pace. Suppose in 2026 EVs go from 40% to 50%, or nominally 40M EV run rate to 50M by end of year. This is annual decline in motor fuel demand of 1.6 mbpd at start of year and 2.0 mbpd by end of year. That is the rate at which demand is falling is accelerating. This keeps accelerating until EVs are near saturation, say about 80% share by 2030. At this point demand is falling over 3.2 mbpd per year. This is well past peak demand. We're talk about how fast the fall off in demand can get. It can get to 3% to 4% per year. This will test just how fast natural production rates can fall. We get quite close to a situation where new drilling stops across the industry. It's not so extreme as to force existing wells to be capped off, though if oil prices fall too low this could happen just to boost the price. Around 2025 there will still be lots of new wells to drill, but this will fall off virtually to zero by 2030. We've talked alot about peak oil, but the five years following the demand peak will be utterly crushing for the oil industry.

The view that there will be a gentle plateau after the peak is really mistaken, IMO. It will be a savage fall-off because EVs have the potential to gain 10% points of share per year in the global market.

 

[Doggydogworld]

https://twitter.com/x/status/1582378526099275779

View attachment 865341

The chart on the left is of particular interest. It suggests that at a national level the transit time from 10% EV market share to 90% could be as short as 8 years. This implies an average market shift of 10% points per year!

When we think about what this may mean for global EV uptake, we must recognize that different countries will start this 10% to 90% transition in different years, and Norway is already exiting it. Even so, the maximum annual global shift in EV market share is likely to happen as EVs hit 50% share. This peak global shift could be as high as 10%. For example, the global market could transit from 45% EV to 55% in the span of 12 months.

Another implication is that automakers looking to hold on to market share will need to be able to sustain a 10% annual product mix shift in their key markets. The automakers that have successfully hit the fit 10% mark appear to be able to do, so far. But the weaker competitor who are lagging behind may be in serious. Pretty much ever automaker (save Tesla and other 100% BEV makers already) need to take the view that BEVs must be 90% of their product mix in 8 years, 2030. Anything short of this breakneck pace will lead to massive loss of market share.

Demand for motor fuel is impacted by this pace. Suppose in 2026 EVs go from 40% to 50%, or nominally 40M EV run rate to 50M by end of year. This is annual decline in motor fuel demand of 1.6 mbpd at start of year and 2.0 mbpd by end of year. That is the rate at which demand is falling is accelerating. This keeps accelerating until EVs are near saturation, say about 80% share by 2030. At this point demand is falling over 3.2 mbpd per year. This is well past peak demand. We're talk about how fast the fall off in demand can get. It can get to 3% to 4% per year. This will test just how fast natural production rates can fall. We get quite close to a situation where new drilling stops across the industry. It's not so extreme as to force existing wells to be capped off, though if oil prices fall too low this could happen just to boost the price. Around 2025 there will still be lots of new wells to drill, but this will fall off virtually to zero by 2030. We've talked alot about peak oil, but the five years following the demand peak will be utterly crushing for the oil industry.

The view that there will be a gentle plateau after the peak is really mistaken, IMO. It will be a savage fall-off because EVs have the potential to gain 10% points of share per year in the global market.

Can someone explain these charts? The green line on Chart 1 is "12 month average" of what? What is the light gray line that shoots up and down like crazy? Why is China only 6 months past the 10% threshold when they crossed that almost 2 years ago?

And why does chart #3 show VW EVs at ~27% of sales??? BEVs are only 6% of VW Group global sales YTD. Total BEV+PHEV (which I don't think they've announced yet) would bump that to ~9%.

This kind of stuff makes me suspect some serious cherry-picking is going on.

 

[jhm]

Can someone explain these charts? The green line on Chart 1 is "12 month average" of what? What is the light gray line that shoots up and down like crazy? Why is China only 6 months past the 10% threshold when they crossed that almost 2 years ago?

And why does chart #3 show VW EVs at ~27% of sales??? BEVs are only 6% of VW Group global sales YTD. Total BEV+PHEV (which I don't think they've announced yet) would bump that to ~9%.

This kind of stuff makes me suspect some serious cherry-picking is going on.

I believe the green line is a 12-month rolling average of the average of all the lines in the series. The number of line thin out over time, so they stop the green line when it is not well supported.

I'm not sure about China or other data questions. I'm also not sure why they are playing around with starting at 10%. I'd prefer a consistent 5% or 1% for all these starting point. Playing around with that parameter introduces a lot of selection bias.

 

[mspohr]

France becomes latest country to leave controversial energy charter treaty

Quitting the ECT, which protects fossil fuel investors from policy changes that might threaten their profits, was ‘coherent’ with Paris climate deal, Macron said

www.theguardian.com

France has become the latest country to pull out of the controversial energy charter treaty (ECT), which protects fossil fuel investors from policy changes that might threaten their profits.

The European Commission has proposed a “modernisation” of the agreement, which would end the writ of the treaty’s secret investor-state courts between EU members.

The energy charter treaty was set up in 1994 to protect western energy firms working in former Soviet countries. It allows investors to sue governments which enact policies that could undermine their expected financial returns.

However, critics have estimated that the final cost in compensation to fossil fuel companies could rise to more than a trillion dollars.

In August, the UK oil firm Rockhopper received a £210m award as compensation for an Italian offshore drilling ban. Italy has also withdrawn from the treaty.

 

[mspohr]

I believe the green line is a 12-month rolling average of the average of all the lines in the series. The number of line thin out over time, so they stop the green line when it is not well supported.

I'm not sure about China or other data questions. I'm also not sure why they are playing around with starting at 10%. I'd prefer a consistent 5% or 1% for all these starting point. Playing around with that parameter introduces a lot of selection bias.

On the "starting point"...
There is a lot of noise at the low flat end of the adoption S curve. Starting at too low a threshold could set a false start to adoption. Once adoption has reached 10%, it's reasonably certain that adoption has started.

 

[mspohr]

Joe Biden is right: America needs a windfall profits tax on Big Oil | Robert Weissman

Consumers are paying as big oil has gobbled up more than $125bn in profits in 2022 – triple the total from last year – doing nothing other than watching world oil prices soar due to Russia’s invasion of Ukraine. The solution to this heist is simple enough: a windfall profits tax that extracts big oil’s unjust enrichment and returns the money to the people. Outraged by big oil’s greed, President Biden was right to call for a windfall profits tax – but wrong to encourage more oil production as an alternative.

 

[ggies07]

The IEA Confirms that Fossil Fuel Demand Is Peaking - RMI

The latest International Energy Agency outlook projects peak fossil fuel demand in every scenario and confirms a rapid clean energy transition is feasible.

rmi.org

RMI has long argued that demand for fossil fuels was peaking; the IEA now agrees. And from this starting point flows a key conclusion: it is time to reallocate capital and retool policy from fossils to renewables.

Part of the change relative to last year is driven by a new natural gas outlook. The golden age of gas is over, according to the IEA.

 

[jhm]

Joe Biden is right: America needs a windfall profits tax on Big Oil | Robert Weissman

Consumers are paying as big oil has gobbled up more than $125bn in profits in 2022 – triple the total from last year – doing nothing other than watching world oil prices soar due to Russia’s invasion of Ukraine. The solution to this heist is simple enough: a windfall profits tax that extracts big oil’s unjust enrichment and returns the money to the people. Outraged by big oil’s greed, President Biden was right to call for a windfall profits tax – but wrong to encourage more oil production as an alternative.

Ok, the logic of the windfall tax is that if you punish oil producers when they price of oil is high, they will reduce prices. This much makes absolutely no economic sense and appeals to moral outrage rather than examination of economic motives.

However, if you frame this as a carbon tax, where the basic objective is to reduce investment in oil production, then this is an excellent, stealthy move. What it does is deprives oil investors of upside potential. This means less capital will be invested into new production. So that is a huge win for climate change action.

But wait, there's more! The tax also kicks in when pain at the pump is the highest. So it actually sets the market up for even higher prices than without it (cuz the investment was discouraged in the first place). Imagine the yellow vest outcry that would happened if a government had a carbon tax that kicked in whenever pain at the pump got bad. No way! Voters will kick political asses out of office. But if that same tax were called a windfall tax, voters would feel validated in their moral outrage against price gouging oil companies, blame oil producers for gas prices, and look to their politicians as righteous heros.

So I wholeheartedly support the windfall tax. It won't do what it purports to do, but it will be a triple win for climate change action. Reducing investment in oil product is a win. Reducing oil demand via more frequent and intense pain at the pump is a win. And finally politician get political cover for imposing a special tax against oil is a win.

Awesome!

 

[jhm]

Komatsu presents 20-ton-class Proterra Powered electric hydraulic excavator - Charged EVs

Komatsu showed off a 20-ton-class electric hydraulic excavator at the recent bauma trade show in Munich. The machine is powered by a lithium-ion battery system from Proterra. Since January 2021, the two companies have been jointly developing electric medium-sized hydraulic excavators, and have...

chargedevs.com

 

[jhm]

The IEA Confirms that Fossil Fuel Demand Is Peaking - RMI

The latest International Energy Agency outlook projects peak fossil fuel demand in every scenario and confirms a rapid clean energy transition is feasible.

rmi.org

Not this about the net zero scenario..

On electric vehicles (EVs), the outlook in the NZE that EVs will make up 60 percent of new sales by 2030 is not especially ambitious considering the rapid rise of EV sales up classic S-curves of growth.

As we have long discussed here, just 60% EV share of market in 2030 is quite conservative. My view is 80% to 100% in 2030.

But it is not actually the share in 2030 that matters for an oil demand peak that comes many years earlier. Rather it is maintaining 50% or so rate of growth in EVs until the peak is forced. This is what can force the peak any year now and almost certainly by 2025.

Notice that the NZE scenario already has peak oil demand at 2019. For some reason they don't annotate that on chart.

Since the NZE is based on conservative assumptions that cut the learning curve rates of solar and batteries in half and wind a third, we are likely to see this scenario become more optimistic each annual revision.

The other scenarios are really out to lunch and don't capture learning curve effects. APS is based on meeting COP pledges in line with 1.5C outcome. The concern lately is that these pledges might not be fully adequate to actually hit 1.5C, but drift up to 1.7 or 1.8. The worry is that governments are not doing enough. And that may be technically true.

However, learning curve effects are real and even modest assumed learning rates lead NZE to perform much better than APS. So we may be in a weird place where government are not and cannot do enough to hit 1.5C. But also that government policies are not really required. What is required is that learning curve rates persist for solar, batteries, wind and electrolyzers.

It's a little bit like the theological retort that you cannot not earn salvation because God's grace is already freely given. Government policies cannot abate climate change because learning curve effect will accomplish that sooner.

 

[mspohr]

Ok, the logic of the windfall tax is that if you punish oil producers when they price of oil is high, they will reduce prices. This much makes absolutely no economic sense and appeals to moral outrage rather than examination of economic motives.

However, if you frame this as a carbon tax, where the basic objective is to reduce investment in oil production, then this is an excellent, stealthy move. What it does is deprives oil investors of upside potential. This means less capital will be invested into new production. So that is a huge win for climate change action.

But wait, there's more! The tax also kicks in when pain at the pump is the highest. So it actually sets the market up for even higher prices than without it (cuz the investment was discouraged in the first place). Imagine the yellow vest outcry that would happened if a government had a carbon tax that kicked in whenever pain at the pump got bad. No way! Voters will kick political asses out of office. But if that same tax were called a windfall tax, voters would feel validated in their moral outrage against price gouging oil companies, blame oil producers for gas prices, and look to their politicians as righteous heros.

So I wholeheartedly support the windfall tax. It won't do what it purports to do, but it will be a triple win for climate change action. Reducing investment in oil product is a win. Reducing oil demand via more frequent and intense pain at the pump is a win. And finally politician get political cover for imposing a special tax against oil is a win.

Awesome!

I think the logic of the windfall tax is to take the profit motive out of raising prices. If oil companies know that their excess profits will be taxed away, they may be reluctant to raise prices since there would be no gain.
Won't affect investment at all since the tax is on profits. They can invest as much as they want. (They aren't investing much anyway since they like having high market prices.)
The tax receipts from the windfall tax can be returned to the people who are paying inflated prices.
Awesome!

 

[jhm]

https://twitter.com/x/status/1589660814679584768

EV share to reach 13.5% this year!
BEV share to reach 10.1% this year!

This gives me such joy. Growth in vehicle count this year is 57%. Just one more doubling of EVs gets us past the oil demand peak. That's just 2 years away, 2024.

I still think 2019 will likely stand as the all time demand peak, but within this decade, the 2020s there must also be a local peak before oil demand is forced into secular decline. In my view, that final peak will happen 2022, 2023, or 2024. Growth is to hot and heavy over the next four years for 2025 to post a new demand peak for oil.

This is no longer about making long-term assumptions. It's about the next 3 years. In 2022, EVs hit 10.6M. Then exceed 21M in 2024. This gets EVs to a scale where even if growth in 2025 is just 25%, 5M, it's big enough to offset 0.2 mbpd of motor fuel demand. This is significant demand decay near the peak.

Additionally, I'm mot worried about PHEVs. BEVs are 3× PHEVs and growing faster. BEVs are crossing the 10% market share right now. So it's hard for PHEVs to keep up, being about 3 years behind. They do help cut oil demand and help some consumer transition to BEVs. So I'm glad to see these contributions. In 2026, BEVs can hit 50% market share. I think PHEVs will be losing market share to BEVs past that point as saturation starts to slow the transition.

 

[jhm]

A few more thoughts about growth in the EV market in 2022.

Total EVs 10.6M, up 56.9% from prior year
BEVs 7.95M, up 65.7%
PHEVs 2.65M, up 35.3%

We note that BEVs are growing at a much higher rate and from a much larger base than PHEVs. So BEVs are really the driving force for growth in the whole plug-in market and the rest of the auto market too. OEMs upgrading customers from ICE to PHEV may be able to avoid some customer attrition, but they would do better migrating customers directly to BEVs if they had the battery supply to do so.

This also has implication for growth of the whole EV market. Suppose for sake of scenario generation that BEVs and PHEVs continue to grow at the same rate next year. In this scenario, 2023 has

BEVs 13.17M (79% share of EV market)
PHEVs 3.59M
Total 16.76M, up 58.1% from prior year

So the whole EV market grows faster as BEV share goes from 75% to 79%.

If we jump forward like this to 2024, we hit 26.68M EVs, up 59.1%, with BEV share of 83% of EV market.

It's easy to see how PHEVs become increasingly irrelevant as BEVs scale up faster. This gives me some confidence that the oil displacement differential between BEVs and PHEVs will not be that consequential for forcing oil demand into secular decline.

Specifically, in 2024 BEVs alone could be 21.8M units (about a quarter of the auto market). And one more year at 65% growth takes them to 36M units (about 40% share of market). Thus, totally ignoring PHEVs, BEVs alone can force a decline in oil demand from 2024 to 2025.

Thus, I find it very hard to see how oil demand could set a new peak in 2025 or later. Once you add back in the contributions of PHEVs, this only makes more likely that 2025 is truly post-peak and may assist in forcing 2024 into the post-peak era.

Additionally, some worry that mineral supplies may at some point slow down the EV transition. Yes, we will need more copper and other mineral resources, but this is largely looking out ten years or more. A new copper mine takes ten or more years to ramp up production. So it's really good for the industry to be working about this now. But in terms of delaying peak oil, the timing makes it irrelevant. Moreover, well past peak oil if copper is too scarce, this does give PHEVs a little bit of a leg up on BEVs as a way to ration copper and other battery minerals. So PHEVs do give the EV transition some robustness to mineral constraints long-term.

 

[petit_bateau]

A few more thoughts about growth in the EV market in 2022.

Total EVs 10.6M, up 56.9% from prior year
BEVs 7.95M, up 65.7%
PHEVs 2.65M, up 35.3%

We note that BEVs are growing at a much higher rate and from a much larger base than PHEVs. So BEVs are really the driving force for growth in the whole plug-in market and the rest of the auto market too. OEMs upgrading customers from ICE to PHEV may be able to avoid some customer attrition, but they would do better migrating customers directly to BEVs if they had the battery supply to do so.

This also has implication for growth of the whole EV market. Suppose for sake of scenario generation that BEVs and PHEVs continue to grow at the same rate next year. In this scenario, 2023 has

BEVs 13.17M (79% share of EV market)
PHEVs 3.59M
Total 16.76M, up 58.1% from prior year

So the whole EV market grows faster as BEV share goes from 75% to 79%.

If we jump forward like this to 2024, we hit 26.68M EVs, up 59.1%, with BEV share of 83% of EV market.

It's easy to see how PHEVs become increasingly irrelevant as BEVs scale up faster. This gives me some confidence that the oil displacement differential between BEVs and PHEVs will not be that consequential for forcing oil demand into secular decline.

Specifically, in 2024 BEVs alone could be 21.8M units (about a quarter of the auto market). And one more year at 65% growth takes them to 36M units (about 40% share of market). Thus, totally ignoring PHEVs, BEVs alone can force a decline in oil demand from 2024 to 2025.

Thus, I find it very hard to see how oil demand could set a new peak in 2025 or later. Once you add back in the contributions of PHEVs, this only makes more likely that 2025 is truly post-peak and may assist in forcing 2024 into the post-peak era.

Additionally, some worry that mineral supplies may at some point slow down the EV transition. Yes, we will need more copper and other mineral resources, but this is largely looking out ten years or more. A new copper mine takes ten or more years to ramp up production. So it's really good for the industry to be working about this now. But in terms of delaying peak oil, the timing makes it irrelevant. Moreover, well past peak oil if copper is too scarce, this does give PHEVs a little bit of a leg up on BEVs as a way to ration copper and other battery minerals. So PHEVs do give the EV transition some robustness to mineral constraints long-term.

My best estimate is peak PHEV sales is 2024/2025 at 4.6m/yr

Peak ICE fleet is 2025 in my opinion, and by first order linkage that is aso peak-vehicle-liquids:

Peak oil I think is past. Peak liquids imho is also past, though not so clearly and we will have to wait another year or two to be sure. Peak fossils comes soon, coal is coming off-plateau in oil-speak and it will be a steep downtrend.

imho

 

[jhm]

https://twitter.com/x/status/1590865921341816832

This is a great thread to help us understand how global carbon emissions is setting a new peak this year, surpassing the peak in 2019.

Note this chart in particular.

Total emissions were up just 0.4GtCO2 this year, of which oil contributed a gain of 0.3 and coal 0.2. Much attention has been put on coal this year because it is supposed to be declining, but the high price and scarcity of gas pushed more coal demand.

But all that attention overlooks the serious uptick of oil emissions, substantially larger driver of increased emissions than coal.

Deploying solar and wind at record pace will help pull back coal and gas this coming year, but we need EVs chiefly keep oil emissions from climbing. We need to be at peak oil demand already.

 

[juanmedina]

Are oil companies recession proof? Since there is high probability of a recession next year and with Exxon at ATH I wonder when it makes sense to get some puts. Oil is going down and demand is decreasing and at 78% up for the year seems kind of steep.

 

[adiggs]

Are oil companies recession proof? Since there is high probability of a recession next year and with Exxon at ATH I wonder when it makes sense to get some puts. Oil is going down and demand is decreasing and at 78% up for the year seems kind of steep.

View attachment 874678

Good call - thanks for posting that.

The previous trade I ran with was Jan '24 100 strike puts on CVX. Shares were around 170ish when I bought the puts for $4 each. More up than down - closed them around $5 for a 25% gain. Position size was pretty small, but the entertainment was high.

But I look again and CVX is now 186 - easily the highest price in a decade, and those same puts can be had for 2.58. I foresee a higher price for those puts between now and say mid 2023. Or the Jan '25 100s are 5.25 for a bigger chunk of time.


I think two things:
1) its time for me to open another one of these positions for shorting an oil company
2) if I find the time and inclination, I also expect I'll do a lot better if I move off of the majors. Something second tier like Occidental Petroleum, Devon Energy. The more pure play of an oil miner the better for my purpose, as I'm using the purchase of puts of an oil miner as my proxy for shorting oil.

 

[Doggydogworld]

But all that attention overlooks the serious uptick of oil emissions, substantially larger driver of increased emissions than coal.

Coal is the bigger driver. You have to use 2019 as the baseline, not 2021, due to COVID's disproportionate impact on oil. Coal is up 0.5 Gt vs. 2019, oil down a bit.

Deploying solar and wind at record pace will help pull back coal and gas this coming year,

In the US, yes, but Chinese and 3rd world coal growth should again outweigh global solar/wind deployments. Europe may also increase coal as they scramble for alternatives to Russian gas.

but we need EVs chiefly keep oil emissions from climbing.

About 60% of EVs today are sold in China, where grid power is mostly coal so the net GHG impact is pretty small. Meanwhile, the world will buy another 80m ICE vehicles this year and only scrap something like 50m. So the global ICE fleet will grow. And ICE efficiency gains are mostly offset by vehicle size/weight growth.

It's tough to move the needle. Banning long range consumer BEVs and directing our constrained battery supply to commercial BEVs and consumer PHEVs would cause oil to peak a little sooner, but there's no constituency for that.

 

[juanmedina]

Are oil companies recession proof? Since there is high probability of a recession next year and with Exxon at ATH I wonder when it makes sense to get some puts. Oil is going down and demand is decreasing and at 78% up for the year seems kind of steep.

View attachment 874678

Are oil companies recession proof? Since there is high probability of a recession next year and with Exxon at ATH I wonder when it makes sense to get some puts. Oil is going down and demand is decreasing and at 78% up for the year seems kind of steep.

View attachment 874678

My XOM puts worked out. It was not a lot of money but I made 25%. I will reload if this thing tries to set another AH.