Shorting Oil, Hedging Tesla

[jhm]

Weird thought reading that article on oilprice - have you noticed how commonly an article refers to either EVs in general, or Tesla's in particular, by using a photo of a Model S at a supercharger? The analogue in the ICE world would be if we always saw an F150 photographed at a gas pump

I really don't have much of a conclusion to draw from it - just that it struck me as interesting, and on balance, I think it's fantastic for Tesla in particular. The other EV's don't get pictured plugged into a 110v or some other public charging infrastructure, but Tesla is getting free advertising all the time for how easy and ubiquitous it is to charge one (it must be - they're always plugged into the same thing, a Supercharger, right?).

Any brand marketer would sacrifice their firstborn to have a brand that is top of mind in its category. When people think about EVs, Tesla is top of mind, and Tesla has distinctive, even iconic imagery to reinforce that.

 

[jhm]

Will India Become The World’s Next EV Hotspot? | OilPrice.com

Here's more information on the EV situation in India. I suspect theblargest issue is that the Indian government wishes to increase use of domestic energy while decreasing fossil imports. India does have oil, gas and coal resources, so expansion of renewables, batteries and EVs can shift the balance closer to self-sufficiency. So the provides a strong economic rationale to buttress a desire to reduce pollution and live up to climate change commitments. Additionally, India still needs to expand grid infrastructure. Pulling back on infrastructure to facilitate oil imports may well serve making needed investments in electrical infrastructure.

 

[TheTalkingMule]

GM announced this morning that they're exiting the India market. I'm no economist, but this does not seem like a good strategy for growth.

 

[jhm]

GM announced this morning that they're exiting the India market. I'm no economist, but this does not seem like a good strategy for growth.

 

[EinSV]

GM announced this morning that they're exiting the India market. I'm no economist, but this does not seem like a good strategy for growth.

GM seems to be suffering from an extreme case of the shortsightedness that plagues most public companies. According to a few recent reports I have seen, if it can't produce profits in a short period of time, it is very likely to get the axe. Here is one example: At Mary Barra’s GM, It’s Profit Before All Else

Of course, many on Wall Street eat this stuff up so it is possible it will boost GM's share price. For a while.

 

[Lessmog]

GM announced this morning that they're exiting the India market. I'm no economist, but this does not seem like a good strategy for growth.

GM seems to be suffering from an extreme case of the shortsightedness that plagues most public companies. According to a few recent reports I have seen, if it can't produce profits in a short period of time, it is very likely to get the axe. Here is one example: At Mary Barra’s GM, It’s Profit Before All Else

Of course, many on Wall Street eat this stuff up so it is possible it will boost GM's share price. For a while.

Food for yet another shorting thread ... YAST ?

 

[kenliles]

Food for yet another shorting thread ...

Papa's little babies love shortnin thread

 

[jhm]

Shorting ICE
Done.

 

[dc_h]

Cool to see an article following our discussion last week about OPEC forcing down the futures market. I'm too busy to read the whole thing today, but the discussion is about OPEC forcing backwardation by hedging their production.

‘’Too Big To Hedge’’ Goldman Explains The Rationale Behind The OPEC Deal | OilPrice.com

 

[jhm]

Cool to see an article following our discussion last week about OPEC forcing down the futures market. I'm too busy to read the whole thing today, but the discussion is about OPEC forcing backwardation by hedging their production.

‘’Too Big To Hedge’’ Goldman Explains The Rationale Behind The OPEC Deal | OilPrice.com

Wonderful. They are starting to ask the right questions, but it is not clear that they actually have a strategy for flipping the futures curve. They would do well to consider an agreement that allows members to increase production as much as they like so long as they hedge or sell forward at a certain level. Thus, the impulse to increase production would be moderated by the cost of hedging, hedging would drive down the futures curve, and this in turn would slow up production increases across the industry.

An OPEC hedging agreement could even set a standard that many other producers could follow. For example, it is not legal for US producers to collude with OPEC, but if there was a standard for a certain degree of hedging, US producers and their investors could consider where they stand in reference to that standard. To hedge at below the OPEC standard would be to assume higher than average market risk. To hedge above the standard is to assume lower market risk. Investors could use this to gauge risk and invest accordingly.

 

[adiggs]

All kinds of interesting oilprice today.

OPEC Deal: 9-Month Extension Looking Increasingly Likely | OilPrice.com

My thinking as I'm reading the article, and it's echoed in some of the text as well, is the previous 6 month supply constraint didn't balance the market. To get the price bump they're looking for, the immediate follow-on 6 month supply constraint extension is now planning to be a 9 month extension. Assuming everybody plays nice and they continue to get a high level of compliance (history generally suggests this is a bad assumption), is the next supply constraint extension for 12 months?

More likely in my estimation is that even if everybody plays nicely until the Aramco IPO, then it'll be the Saudis that officially or unofficially end the supply constraint after the IPO.


Also in the article is a note from Goldman talking about the need for the market to enter backwardation in order to remove the incentive for more and more shale drilling the US. The way I understand the market, the obvious and direct method for creating backwardation is for OPEC to start selling future delivery of oil in really big quantities. More simply, OPEC joins the producers that are hedging their future production, and OPEC has the volume to push down the future prices and take away that market inefficiency that they've created (and in which US shale producers are hiding out and taking market share). It's counter to their historical business model, and it looks like it is at minimum a short term adaptation they need to make.

Any bets on whether we see OPEC become serious hedgers of future production, specifically to induce backwardation?


ALSO in the article is a link to WSJ and an article about SUV consumption in China:
Gas Guzzlers Rule in China

You'd think you were reading an article about the USA and it's love affair with big cars

It might represent good news for oil interests - I read it as good news for Tesla S/X demand, and in particular X demand.

 

[SebastianR]

Any bets on whether we see OPEC become serious hedgers of future production, specifically to induce backwardation?

I kindda doubt it: At least when it comes to Saudi Arabia: If the Aramco premise is that oil is worth 75USD/barrel then any future sale at less than that would seem to destroy the Aramco valuation credibility. So I don't think they can sell any futures at these prices... (or at least they can't be caught doing that).

 

[adiggs]

I kindda doubt it: At least when it comes to Saudi Arabia: If the Aramco premise is that oil is worth 75USD/barrel then any future sale at less than that would seem to destroy the Aramco valuation credibility. So I don't think they can sell any futures at these prices... (or at least they can't be caught doing that).

I hadn't heard that about the Aramco value proposition, but I freely admit to not following it closely as a company - just as an important member of an industry. With that as part of their value proposition, they're caught between a rock and a hard place. The only option I see is the hand they're playing - lose market share in the short term to prop up the price of oil, presumably to reverse course after the IPO.

I don't know if there was any feasible way for them to IPO faster, but I'm thinking today that this long drawn out offering process is bad for the value they will receive - it leaves too much time to figure out whether they're selling something real or a mirage. (It looks more and more like a mirage to me - maybe a few years of good times, but not decades).

 

[ValueAnalyst]

All kinds of interesting oilprice today.

OPEC Deal: 9-Month Extension Looking Increasingly Likely | OilPrice.com

My thinking as I'm reading the article, and it's echoed in some of the text as well, is the previous 6 month supply constraint didn't balance the market. To get the price bump they're looking for, the immediate follow-on 6 month supply constraint extension is now planning to be a 9 month extension. Assuming everybody plays nice and they continue to get a high level of compliance (history generally suggests this is a bad assumption), is the next supply constraint extension for 12 months?

More likely in my estimation is that even if everybody plays nicely until the Aramco IPO, then it'll be the Saudis that officially or unofficially end the supply constraint after the IPO.


Also in the article is a note from Goldman talking about the need for the market to enter backwardation in order to remove the incentive for more and more shale drilling the US. The way I understand the market, the obvious and direct method for creating backwardation is for OPEC to start selling future delivery of oil in really big quantities. More simply, OPEC joins the producers that are hedging their future production, and OPEC has the volume to push down the future prices and take away that market inefficiency that they've created (and in which US shale producers are hiding out and taking market share). It's counter to their historical business model, and it looks like it is at minimum a short term adaptation they need to make.

Any bets on whether we see OPEC become serious hedgers of future production, specifically to induce backwardation?


ALSO in the article is a link to WSJ and an article about SUV consumption in China:
Gas Guzzlers Rule in China

You'd think you were reading an article about the USA and it's love affair with big cars

It might represent good news for oil interests - I read it as good news for Tesla S/X demand, and in particular X demand.

Backwardation means spot prices higher than futures prices; kinda like inverted yield curve.

Has nothing to do with Aramco or OPEC entering into futures contracts. It's just market's perception of price now vs. in the future.

You can follow me on Twitter if you'd like to learn more about oil @ValueAnalyst1. Or you can read #OOTT.

 

[larmor]

I hadn't heard that about the Aramco value proposition, but I freely admit to not following it closely as a company - just as an important member of an industry. With that as part of their value proposition, they're caught between a rock and a hard place. The only option I see is the hand they're playing - lose market share in the short term to prop up the price of oil, presumably to reverse course after the IPO.

I don't know if there was any feasible way for them to IPO faster, but I'm thinking today that this long drawn out offering process is bad for the value they will receive - it leaves too much time to figure out whether they're selling something real or a mirage. (It looks more and more like a mirage to me - maybe a few years of good times, but not decades).

Even simpler than IPO for aramco-- all aramco has to do is buy a boatload of solar panels, say $1bn. Not install or use, just buy. This would put the oil market in a panic at the presumption of oil shortages. Just behavioral economics which look to price future supply and no relation to reality of supply and demand, both of which are making oil cheaper...

 

[renim]

FWIW,
the same Chinese government ministry that is pushing the 12% new energy vehicle credits by 2020 (at about 2-4 credits per vehicle) is also targeting 30million vehicles produced annually in 2020 and 35million vehicles produced annually by 2025.

SUV trend is however excellent for Chinese Chinese PHEV (Chinese company, Chinese sales, thus the double Chinese (as opposed to VW or GM Chinese)

 

[jhm]

Any bets on whether we see OPEC become serious hedgers of future production, specifically to induce backwardation?

Well, they should, but I don't think they are sophisticated enough to commit to it. If they under stood it, they would not need to cut production at all. They only need to hedge a certain fraction of what they will produce over the next 6 years. Then pump like crazy. This would send the futures curve down in a hurry. Oil rushes out of inventory. Anyone that does not hedge get wiped out. Problem solved.

The problem is that US shale wells have much shorter duration than everywhere else. That is, when a shale well is completed it produces most of its oil very early and decline quickly. So when OPEC prop the price up for just 9 months, that's just fine for shale. They can pop off a bunch of DUCs, soak up the high prices while they last and virtually pull out before OPEC jumps back in the game. Also during the episode shale has locked in hedges. So a year later OPEC is no better off. To clear inventory, they absolutely need to create the expectation that oil prices will surely fall in the future. There needs to be a credible threat. Instead, they send all the wrong signals. They say we're going to prop up prices in the short run and prices will be sky high in the long run because the whole f*****g world will be willing to pay $90/b once demand catches up with supply. And they wonder why the futures curve remains in rapt contango.

It is said that the cure for low prices is low prices. The truth is that OPEC countries are so economically dependent on oil revenue that they prefer to perpetuate a sick market than to allow the cure to run its course.

 

[renim]

The Jinnie that OPEC does not want to let out of the bottle is annual price contracts, that would enshrine permanent high production and low sales prices for oil. China/Japan/Korea would love annual price contracts for oil, it would trend world oil price down to zero geo-poilitical premium, and transfer the profits to developers who include the buyers. Extremely different market to today's oil market.

Considering that China/Japan/Korea are a far far greater net oil importer than USA/Canada/Mexico, there is practically no limit to how much oil can be forward sold. And oil is moving that way, the gravitation pull of the yuan/yen is strong.

 

[jhm]

The Jinnie that OPEC does not want to let out of the bottle is annual price contracts, that would enshrine permanent high production and low sales prices for oil. China/Japan/Korea would love annual price contracts for oil, it would trend world oil price down to zero geo-poilitical premium, and transfer the profits to developers who include the buyers. Extremely different market to today's oil market.

Considering that China/Japan/Korea are a far far greater net oil importer than USA/Canada/Mexico, there is practically no limit to how much oil can be forward sold. And oil is moving that way, the gravitation pull of the yuan/yen is strong.

That is very insightful. Market power is shifting from larger exporters to large importers. And as demand growth slows and eventually reverses, it will be very hard to resist this shift to a buyers market.

At the same time the US is just a few years from becoming a net exporter. But more accurately, the US will be a net importer of crude but more than make up for this as a net exporter of refinery products. In any case, this still makes the US more of a seller than buyer at a time when buyers have more power. So the buying power will reside in just a few import markets.

 

[adiggs]

Article on zero hedge, linked from oilprice:
The Math Behind OPEC's Revised Production Cut Still Does Not Work | Zero Hedge

They work through a variety of supply and demand sources and the math they come up with says that the 9 month extension to the supply constraint by opec won't come close to clearing the excess oil inventory in the market this year. If that's really the goal, the math (again according to this article) needs to be at least 2x the size of the constraint implemented today, and even that might not be enough.