Shorting Oil, Hedging Tesla

[adiggs]

How certain are you @jhm that it's hedge funds that are so extremely long on oil? That's one of my questions for myself and for that article as I'm questioning assumptions - does that article assume that it's really hedge funds that are long oil because that's traditionally who it would be based on years of how the market has worked? Though I also don't have an alternative and better explanation - I too don't get what the market participants are up to, whoever they are (your information just makes a bad looking situation to me, look WAY worse).

Do we actually have a data set that tells us who the market actors are, or are we (and that article's author) guessing?


I don't know the answer to my own question - it's why I'm posing the question.


And why would the speculators go so long on oil, when the producers (I assume it is anyway) are so busy going short oil (agreeing now, to sell oil in the future at ~$55).

 

[jhm]

Natural Gas Bulls Crushed As Prices Tank | OilPrice.com
Here's some back story on the collapse of natural gas price. Perhaps you could just blame this on climate change.

 

[kenliles]

Natural Gas Bulls Crushed As Prices Tank | OilPrice.com
Here's some back story on the collapse of natural gas price. Perhaps you could just blame this on climate change.

From the article:
"
In fact, the winter of 2017 is turning out to be the second warmest on record, second only to last year’s winter....
“Mother nature continues to be bearish, ultra-bearish,” Kyle Cooper, a consultant for Ion Energy Group, said in a WSJ interview. “The utter lack of (heating) demand is, in my opinion, 99.9 percent of the natural-gas story.”
"


I'm continually amazed at the statements these guys make keeping a straight face-- while they keep investing in pumping carbons, producing the exact conditions they bet against happening...
Why don't they just skip the drama-- pump it directly into the atmosphere without bothering to distribute to customers and we won't need heating at all- then just short the price-
seems a lot simpler and less risky, given you don't give a *sugar* anyway...
(Rant over - sorry)

 

[jhm]

How certain are you @jhm that it's hedge funds that are so extremely long on oil? That's one of my questions for myself and for that article as I'm questioning assumptions - does that article assume that it's really hedge funds that are long oil because that's traditionally who it would be based on years of how the market has worked? Though I also don't have an alternative and better explanation - I too don't get what the market participants are up to, whoever they are (your information just makes a bad looking situation to me, look WAY worse).

Do we actually have a data set that tells us who the market actors are, or are we (and that article's author) guessing?


I don't know the answer to my own question - it's why I'm posing the question.


And why would the speculators go so long on oil, when the producers (I assume it is anyway) are so busy going short oil (agreeing now, to sell oil in the future at ~$55).

I don't know where Gartman gets this data. I've seen this sort of thing from other sources. So I suspect there is a credible way to measure this.

That said, we don't always know the motives even when we know who is taking a position. As you mentioned in your previous post, oil producers are naturally long on oil. Over the last two years many companies have gone bankrupt. So I think it quite reasonable that producers are selling lots of futures to lock in revenue. Moreover, the future curve is quite flat, which can be a result of producers selling into the future. An rise in the curve is a good opportunity to lock in revenue. So if the prices are buyers that can motivate hedge funds to be the speculative counterparties to these futures. So it need not be the case that hedges are particularly bullish, if the terms offered are viewed as generous. Again because the futures curve is so flat, I suspect that this huge long position is producer driven rather than speculator or consumer driven. Now it could be that the hedges are getting backed into a tough corner. Should the curve move into backwardation, then oil will flood out of storage and into the spot market driving down the price of oil. Now, if the hedges are backed into a corner, they are also looking for a way out. Perhaps they can drum up enough hype in the market to offload their long position on unsuspecting investors. This is why hype is part of a bubble just before it bursts.

 

[SebastianR]

Hm, the implications of this is worrying:

The whole situation seems very fragile to me. What really worries me is that the hedges have information on some coming exogenous disruption to the oil supply, something like a military attack that would shut down production for a whole country or region. The hedges need some sort of black swan to save them from what looks like a price collapse.

Have we now arrived at predicting the next war based on financial needs of big oil? What worries me also is that typically you unite a country behind an unpopular leader by starting a war with an outside 3rd party. So which country could that be? Which country does not have any ties to the POTUS businesses around the globe?

All joking aside: Occam's razor implies that people expect economic growth and that this implies that oil demand is going up.

 

[jhm]

Hm, the implications of this is worrying:



Have we now arrived at predicting the next war based on financial needs of big oil? What worries me also is that typically you unite a country behind an unpopular leader by starting a war with an outside 3rd party. So which country could that be? Which country does not have any ties to the POTUS businesses around the globe?

All joking aside: Occam's razor implies that people expect economic growth and that this implies that oil demand is going up.

I am not predicting war on this basis, just pointing to the need for a black swan sort of event.

Yes, oil bulls believe in growing demand. But it will be too little to late. Most place growth estimates at 1.2 mbpd per year. Let's break that down. That is about an extra 100 kbpd each month across the whole globe. In the last 4 weeks total crude supplied to US refineries was 15,836 kbpd, but in the 4 weeks before that it was 15,653. So US demand goes up about twice as much as global demand. Meanwhile, US consumption of petroleum products over the same two periods is 19,356 kbpd down from 19,755 kbpd. (Numbers are higher than supply because of net imports.) So US consumption has fallen 400 mbpd in the last month even as the supply of crude to US refiners has increased about 180 kbpd. So net over supply has increased by about 6 times the expected monthly growth in demand.

Now this particular analysis is not so reliable because it is looking over a relatively short time. Things like change in seasonal demand add alot of noise. But I wanted to illustrate how demand growth expectations are wholly inadequate to resolve a short-term oversupply issue. US inventories are higher than they were a year ago. US commercial crude stock is up 45 million barrels or 9.6% year over year. Increasing demand last year did not even come close to reversing the glut. Demand growth is not the solution where a lack of financial discipline among oil investors is the problem.

 

[TheTalkingMule]

If oil revenues dictate our entire world and the only way to extend those oil revenues is an expansion of global warfare, then you will likely be given an expansion of global warfare.

 

[jhm]

Battery Wars – China Beating Tesla In The Gigafactory Race | OilPrice.com

Mining and oil folks are starting to take notice.

 

[dc_h]

Hm, the implications of this is worrying:



Have we now arrived at predicting the next war based on financial needs of big oil? What worries me also is that typically you unite a country behind an unpopular leader by starting a war with an outside 3rd party. So which country could that be? Which country does not have any ties to the POTUS businesses around the globe?

All joking aside: Occam's razor implies that people expect economic growth and that this implies that oil demand is going up.

A lower risk option would be to put trade restrictions on Venezuela. Their administration is engaged in drug dealing. Michael Corleone could spin a great story about a dirty cop that's mixed up in drugs. They are a patron of Cuba and Russia, but Putin won't care if it helps his oil prices, and it helps the US without hurting the Saudi's. You won't get 100% participation, but it puts even more pressure on a bankrupt oil producer. If Trump forced regime change in Venezuela it would be a big foreign policy win at very low risk.

Trump is not a singles hitter, so he's more likely to take a swing at Iran, but this would be a safer bet.

I doubt either happen short term. I bought SCO today and expect $40 before $60 a barrel. If oil hits $40, I will get out and expect some force majeure that will support prices. You really need to take over 2 million barrels out of production to reduce stockpiles in any meaningful way, so even encouraging Iran to take a shot at an aircraft carrier won't drive prices over $65.

 

[renim]

Regime change in Venezula is a massive black swan to the gold price.

Venezula should be one of the world's wealthiest countries, instead they have so thoroughly mismanaged themselves that the following happens IMF Sees Venezuela Inflation Rocketing to 720 Percent in 2016

 

[dc_h]

Regime change in Venezula is a massive black swan to the gold price.

Venezula should be one of the world's wealthiest countries, instead they have so thoroughly mismanaged themselves that the following happens IMF Sees Venezuela Inflation Rocketing to 720 Percent in 2016

Pre-Chavez they were one of Latin America's wealthiest countries. Very sad.

 

[renim]

Battery Wars – China Beating Tesla In The Gigafactory Race | OilPrice.com

Mining and oil folks are starting to take notice.

ahhh good old times
2008
http://www.asx.com.au/asxpdf/20081127/pdf/31dw9pncjr4kfl.pdf

 

[neroden]

Pre-Chavez they were one of Latin America's wealthiest countries. Very sad.

Well, it was oil money.

However, the situation in Venezuela could actually be predicted by looking at lead exposure: they were one of the last countries to remove lead from gasoline (they didn't even sell unleaded until 1999 and didn't ban leaded until *2005*) and had *very* heavy lead exposure. Lead exposure in early childhood causes stupidity and makes people more violent when they grow up. Rick Nevin has a catalog of the scientific studies on this and Kevin Drum has linked to others.

I believe the projections, now that they've finally gotten lead out of the gasoline, are that the violence should die down starting in the 2020s. The time lag between lead exposure and crime rates is *18 to 24 years*, and the same is probably true of violence, rioting, and general disruption.

The removal of lead from the human environment is probably the most socially valuable program ever done. The introduction of tetraethyl lead into gasoline by Sloan and Kettering is probably the most evil single act in the history of humanity, judged by its consquences.

UN Environment Program Partnership for Clean Fuels and Vehicles has been working on the worldwide lead phaseout. Lead is still used in motor vehicle fuel in Algeria, Yemen, and Iraq (partly due to disruption of the Iraq government by the US-started war, disruption of the Yemen government by the Saudi invasion, and there's no excuse for Algeria). And it is disgracefully still used in small private plane fuel in the US, because the rich plane owners lobby is capable of delaying government action, even as they poison children daily.

 

[jhm]

http://ir.eia.gov/wpsr/overview.pdf

So the new EIA weekly petroleum report is out, and the oil market is fairly bullish in response. The good headline news is that crude inventory only grew by 0.567 million barrels. But countering that is that net imports of crude fell by 9.73 million. Moreover, refineries are slowing production, leading to a draw down in total inventory (crude plus refinery products).

So nominally the market looks balance, but in reality the US is exporting surplus rather than holding it in stock. It could be that the US is running short on storage capacity, but the futures curve tells a different story front month future is at $54.36. And the curve rise for the next 5 months to $55.20 in Sept. This is enough front-end contango to pay physical oil traders to store the oil for the next few months. However, the curve fall into backwardation from there out. It falls to $54.09 in Dec 2018 and $53.43 in Dec 2019. There is talk of OPEC extending the production freeze, and that may be driving expectations 6 months out.

But I think the US pushing surplus out to the rest of the world rather than storing it domestically indicates weakness. Storage will become tight outside the US too (or at least the willingness to store oil will wear thin), and as that happens, we could see oil prices fall everywhere. I continued to be baffled by so much bullishness in the oil market.

 

[GoTslaGo]

Well, it was oil money.

However, the situation in Venezuela could actually be predicted by looking at lead exposure: they were one of the last countries to remove lead from gasoline (they didn't even sell unleaded until 1999 and didn't ban leaded until *2005*) and had *very* heavy lead exposure. Lead exposure in early childhood causes stupidity and makes people more violent when they grow up. Rick Nevin has a catalog of the scientific studies on this and Kevin Drum has linked to others.

I believe the projections, now that they've finally gotten lead out of the gasoline, are that the violence should die down starting in the 2020s. The time lag between lead exposure and crime rates is *18 to 24 years*, and the same is probably true of violence, rioting, and general disruption.

The removal of lead from the human environment is probably the most socially valuable program ever done. The introduction of tetraethyl lead into gasoline by Sloan and Kettering is probably the most evil single act in the history of humanity, judged by its consquences.

UN Environment Program Partnership for Clean Fuels and Vehicles has been working on the worldwide lead phaseout. Lead is still used in motor vehicle fuel in Algeria, Yemen, and Iraq (partly due to disruption of the Iraq government by the US-started war, disruption of the Yemen government by the Saudi invasion, and there's no excuse for Algeria). And it is disgracefully still used in small private plane fuel in the US, because the rich plane owners lobby is capable of delaying government action, even as they poison children daily.

Sorry off topic, but...

Some good articles supporting your assertion:

How Lead Caused America's Violent Crime Epidemic

Sick Kids Are Just the Beginning of America’s Lead Crisis

Off topic, but always something that interested me:

Decline and Fall: Did Lead Poisoning Bring Down the Roman Empire?

Quote:

The verdict
Lead poisoning doesn’t seem to have been a widespread enough problem in the Roman world to have brought down the empire, and the theory holds even less water when you consider that the Romans were using lead pipes and consuming lead products in high volume even before Julius Caesar. Still, the abnormally high lead exposure of certain groups of Roman society may have created some interesting issues, such as the low fertility rates that seem to have plagued the Roman elite.

End quote.

To this bolded quote I add that one has to remember that the Elite were the ones who ran the empire, and decided the fate of the empire.

 

[jhm]

Saudi Arabia $2 Trillion Aramco Vision Runs Into Market Reality

This is pretty interesting. The Saudis think Aramco is worth $2T, but analysts are valuing it in range of $400B, but no more than. $1000B.

The discrepancy here revolves around the value of reserves. The Saudis have 261B barrels in their reserves. At a typical value of $8/b, this one asset alone would be worth over $2T.

Unfortunately for the the Saudis, this is not how oil companies are valued. Specifically, the time it takes to produce 73 years worth of oil discounts the value of reserves. This much is basic finance. But more critically, investors are coming to question the longterm viability of oil itself. Peak demand is coming. Royal Dutch Shell recognizes that this peak could occur before 2030.

So what is the Saudi reserve worth? Not $8/b, perhaps $1 to $2 per barrel.

So now we know. The industry really does know that reserves are losing value fast. Keep pumping, guys.

 

[ggr]

Saudi Arabia $2 Trillion Aramco Vision Runs Into Market Reality

This is pretty interesting. The Saudis think Aramco is worth $2T, but analysts are valuing it in range of $400B, but no more than. $1000B.

The discrepancy here revolves around the value of reserves. The Saudis have 261B barrels in their reserves. At a typical value of $8/b, this one asset alone would be worth over $2T.

Unfortunately for the the Saudis, this is not how oil companies are valued. Specifically, the time it takes to produce 73 years worth of oil discounts the value of reserves. This much is basic finance. But more critically, investors are coming to question the longterm viability of oil itself. Peak demand is coming. Royal Dutch Shell recognizes that this peak could occur before 2030.

So what is the Saudi reserve worth? Not $8/b, perhaps $1 to $2 per barrel.

So now we know. The industry really does know that reserves are losing value fast. Keep pumping, guys.

Anyway, 2/3rds of that has to stay in the ground or the planet is toast.

 

[GoTslaGo]

Econoday Economic Report: Baker-Hughes Rig Count February 24, 2017

Increasing rig counts in NA:

Quote:

Released On 2/24/2017 1:00:00 PM For wk2/24, 2017
....................................Prior....Actual
N. Amer. Rig Count.....1082.....1095
U.S................................751......754
Gulf of Mexico................17........17
Canada.........................331......341

Highlights

The Baker Hughes North American rig count is up 13 in the February 24 week to 1,095. The U.S. rig count is up 3 to 754 and is up 252 rigs from last year. The Canadian count is up 10 from last week to 341, and compared to last year is up 166.

For the U.S. count, rigs classified as drilling for oil are up 5 to 602, gas rigs are down 2 to 151 and miscellaneous rigs are unchanged at 1. Canadian oil rigs are up 12 to 206 but gas rigs are down 2 to 135.

End Quote.

 

[jhm]

Anyway, 2/3rds of that has to stay in the ground or the planet is toast.

That's the back reality that the industry is unwilling to face. In the political domain, the industry knows that it can buy political sentiment and politicians. So to some extent climate denialism undermines the political threat posed by climate change.

However denialism will not work in the economic space. Primarily the advance of vehicle electrification is what undermines the value of oil to the point that the bulk of known reserves will never be produced. Denial of the threat of EVs will be the economic undoing of the oil industry.

So will economic weakness lead to political weakness, especially when so much of the politics are paid for? The political power of the coal industry is not what it used to be. It seems Trump was just pandering for votes in coal country. I'd like to see Tesla put a Gigafactory in the middle of coal country and the rust belt just to change the narrative, just to shift the politics. As voters come to see that our jobs and economics security are more in driving forward with EVS and renewables than in clinging to fossil fuela, the politics will turn.

 

[GoTslaGo]

So will economic weakness lead to political weakness, especially when so much of the politics are paid for? The political power of the coal industry is not what it used to be. It seems Trump was just pandering for votes in coal country. I'd like to see Tesla put a Gigafactory in the middle of coal country and the rust belt just to change the narrative, just to shift the politics. As voters come to see that our jobs and economics security are more in driving forward with EVS and renewables than in clinging to fossil fuela, the politics will turn.

I don't know how prevalent hydro is in WV and western PA (I am making a presumption about what tri-state area Musk was referring to), but considering the mountainous terrain and plenty of rain/water in the region it would seem to be a good potential source of renewable energy. Unless coal gets revived and flattens the mountains...