Shorting Oil, Hedging Tesla

[jhm]

Looks like someone got my message.

EIA Weekly came out 9:30AM central time. My post above was 10:26 central. Started tweeting 11:10. Price tumbles 11:30. Coinvidence?

 

[SwTslaGrl]

I just saw this article,
This is the real reason we’re ‘drowning in oil,’ says Ed Yardeni
“As long as the sun will come out tomorrow (as little orphan Annie predicted), solar energy is likely to get increasingly cheaper and fuel a growing fleet of electric passenger cars,” he said.

 

[jhm]

I just saw this article,
This is the real reason we’re ‘drowning in oil,’ says Ed Yardeni
“As long as the sun will come out tomorrow (as little orphan Annie predicted), solar energy is likely to get increasingly cheaper and fuel a growing fleet of electric passenger cars,” he said.

Yardeni seems to be giving expression to a reserve liquidation theory. The tough question for any analyst to address is why the industry so bent on oversupply.

Notice also that Yardeni only points to electric passenger cars. The more immediate threat is electric commercial vehicles. I think Tesla alone could deliver over 700k semi trucks by end of 2021. This would whack 1 mb/d of demand for diesel. The price of diesel may need to fall below $1/gal. Curiously at that price for distillates, LNG could get capped at $7.25/mmBtu. So declining diesel demand could be traumatic for both oil and natural gas. But I don't think analysts have even contemplated such a scenario yet.

 

[adiggs]

Interesting article about some of the internal dynamics of US companies that are big in shale oil production:
The Most Ignored Oil Price Influencer | OilPrice.com

One of the article links goes to this very interesting article:
Apache's Alpine High Discovery Defies Conventional Wisdom

As I read this, I was thinking that this is what innovation and an aggressive set of market competitors looks like in the oil & gas space. I'm also thinking that if OPEC (and friends) aren't careful, these people are going to use the umbrella OPEC is holding up for them and keep pushing their prices down, while being profitable doing so, and keep taking market share away from OPEC.

 

[renim]

OPEC (and the unhedged shale oil producers) won't like this, oil price is solidly in Contango.
Crude Oil Futures - CME Group

in short, price of oil is low now, and rises in the future out to 2025. At least that is how the market is pricing it.

which is the view that is taken when no impact from EVs have been felt (a fleet of 2 million EVs is nothing compared to a fleet of 1 billion ICEs)

so the price of oil now is purely driven by drill baby drill. but what happens when plug in vehicles start to have impact?


these are improving times for oil consuming economies, EU, Japan, China, USA
for every import barrel of oil that north american's substitute with a local frack barrel, means that the top bidder (USA) in the market has walked away, and both WTI/Brent are diminished because of it. This can make or break national / regional economies.
If America can become a net exporter of oil, watch America's EV growth replicate Norway's but on a massive scale.

The link between oil price and TSLA is now extinct.
The increasing link between oil independence and TSLA is now existing.

 

[adiggs]

Interesting article about some of the internal dynamics of US companies that are big in shale oil production:
The Most Ignored Oil Price Influencer | OilPrice.com

One of the article links goes to this very interesting article:
Apache's Alpine High Discovery Defies Conventional Wisdom

As I read this, I was thinking that this is what innovation and an aggressive set of market competitors looks like in the oil & gas space. I'm also thinking that if OPEC (and friends) aren't careful, these people are going to use the umbrella OPEC is holding up for them and keep pushing their prices down, while being profitable doing so, and keep taking market share away from OPEC.

I'll add that this behavior by some competitors, along with the high inventory levels, and looking like the beginning of perma-oversupply (to me - I'm probably wrong ).

The counter for OPEC? The only one I can see is the one available to them in a free market - either cede that market share to keep the market reasonably close to balanced (and watch their revenue be steadily taken away from them), or for OPEC to get their costs down and their output back up. Drive the price down so low that US shale producers are driven from the market (and hope like heck OPEC can get their costs down that low and don't just drive money out of the market, but not their competitors). OPEC is going to purely hate watching market share going away on a monthly basis.

I sure do like capitalism. This looks like a great dynamic for consumers of all kinds, industry and individual.


This looks like a market where perversely, the lower the price goes that producers can sell their product at, the MORE of the product those producers will create / extract / provide to the market.

Instead of lower prices = lower supply, it looks to me like we're going to see lower prices = same / increased supply within a range down to about $15 or $20/barrel. Do I hear $10/bbl? Somewhere down there the marginal cost to produce a barrel of oil, assuming infrastructure is free (already built), will become greater than the revenue from selling that barrel of oil, and suppliers will start withdrawing from the market.


Maybe it's time for me to get me some SCO.

Ugh - they issue Form K-1's. I've done that before, and I'll do it again. But only if I'm putting more into the investment to make it worth the hassle. I did a K-1 for a few years for around $500/year worth of dividends / distributions. It just wasn't worth the extra pain at tax time (but it was a great investment - totally worth doing at another 1 or 2 orders of magnitude!)

 

[renim]

re China's standards, is like a combined federal fleet CAFE and state CARB ZEV

China's CAFE like is corporate average, but based on vehicles weight (instead of USA footprint), so larger cars are not penalized. (so not promoting Jap/Euro penalty box) This should still be good for traditional stretched car Chinese taste (but not as much as USA footprint standards)
China's CAFE also has multi bonus for EVs and PHEVs, again, very good for Chinese car companies.

There is chatter that the 8%,10%,12% will be reduced to 5%, 8%, 12% (for 2018, 2019,2020) respectively and that 2018,2019 deficits can carry over. The value of ZEV credits is moved from a step function to a formula. (basically unchanged, but smoothed so instead of 3 or 4 credit a 3.5 credit is possible)

plenty of Chinese 50kWh class EVs are about 300km 'range' I would expect a Euro size 40kWh Renault Zoe to max out the 350km range.
http://www.d1ev.com/

 

[renim]

Tesla is fortunate they escape this net, not being a ICE seller, they are exempt.
The Germans(Korean) and Toyota (Panasonic) are using battery suppliers who are not, so a mad rush to ensure verification of Chinese Chinese batterys are OK for their EVs/PHEVs.

Don't even think about a USA Gigfactory, being acceptable.

One other point, Tesla X is unique, Tesla S ludicrous is unique, Tesla S 75/100 are, well subject to competition, this will reduce normal Tesla S sales in China due to competition, but the high profit Tesla should stay OK. So perhaps a 30% drop in Tesla sales growth, but minimal effect on Tesla profitability. Don't know about about Tesla 3, I suspect it will sell in China, but not as well as Tesla X.

 

[dc_h]

Tesla is fortunate they escape this net, not being a ICE seller, they are exempt.
The Germans(Korean) and Toyota (Panasonic) are using battery suppliers who are not, so a mad rush to ensure verification of Chinese Chinese batterys are OK for their EVs/PHEVs.

Don't even think about a USA Gigfactory, being acceptable.

One other point, Tesla X is unique, Tesla S ludicrous is unique, Tesla S 75/100 are, well subject to competition, this will reduce normal Tesla S sales in China due to competition, but the high profit Tesla should stay OK. So perhaps a 30% drop in Tesla sales growth, but minimal effect on Tesla profitability. Don't know about about Tesla 3, I suspect it will sell in China, but not as well as Tesla X.

I think their brand, upheld by the product, will support them well. My drop share, but growth will accelerate.
If they can do the new GF in phases, how much assembly vs production can they do and avoid tariffs? Ship cells from Japan, assemble packs and finish car like Tilburg. Phase two start cell production and phase three full assembly and paint. Paying for each new phase from cash flow.

How fast can they build 2 or 3 cubes to get started?

 

[renim]

If Toyota's use of Panasonic facilities in China are not acceptable, then Tesla's use of Panasonic's facilities in either Japan or USA will not be acceptable.

point is, Tesla does not sell ICE cars, so does not need to buy credits.

China's ZEV credit regime acceptability starts at the cell level. They want Chinese Chinese cells, not Chinese assembled Japanese/Korean/American cells.

 

[renim]

The need to verify Chinese cell suppliers will basically be crisis mode at Toyota/BMW/VW.

Daimler and Nissan should both be A OK.

GM goes with cheapest anyway. so will be OK, just rushed.

good for BYD, bad for Great Wall

 

[neroden]

re China's standards, is like a combined federal fleet CAFE and state CARB ZEV

So you seem to be way better at reading Chinese than I am.

Do you know the answer to my three big questions:
(1) Are the ZEV credits tradeable?
(2) Does Tesla, as a foreign company selling cars in China, get any?
Could be a nice little source of capital for a few years...

(3) There is speculation that electric car manufacturers may now be off the Negative List 2017, allowed to manufacture in Free Trade Zones without a majority Chinese partner. Can you tell one way or the other? I know *battery* manufacturers for electric vehicles are off the negative list already. If electric car manufacturers are also off the negative list too, Tesla can just set up a wholly owned Gigafactory in China. But are they?

 

[renim]

So you seem to be way better at reading Chinese than I am.

Do you know the answer to my three big questions:
(1) Are the ZEV credits tradeable?
(2) Does Tesla, as a foreign company selling cars in China, get any?
Could be a nice little source of capital for a few years...

(3) There is speculation that electric car manufacturers may now be off the Negative List 2017, allowed to manufacture in Free Trade Zones without a majority Chinese partner. Can you tell one way or the other? I know *battery* manufacturers for electric vehicles are off the negative list already. If electric car manufacturers are also off the negative list too, Tesla can just set up a wholly owned Gigafactory in China. But are they?

No I don't read Chinese, I use google translate.

1)China's ZEV credits are very tradeable, that is the point, no fines, just stop sales until sufficient credits are bought. brutal and simple
1) i suspect China's CAFE has fines, which is gentler than no fines.

2) Foreign car companies can easily get any, if their chain from cell to pack to car is compliant. If Tesla to use perhaps BYD 18650's then it probably easy for Tesla to be compliant, but using Tesla 18650's not a chance. For example Nissan is famous for targeting a $8,000 EV for China, that will use local cells, packs, etc etc etc http://europe.autonews.com/article/...renault-nissans-ghosn-eyes-$8000-ev-for-china

3)China really really really wants to consolidate its car industry into fewer stronger players, this EV game is yet another backdoor for more, weaker players. I suspect the route will be for Chinese EV makers is to buy a Chinese ICE manufacturer, or just die. I think Tesla can set up another li ion battery factory in China, just another of many Chinese battery gigafactory. But the sourcing of the cathode and anode will need to Chinese approved, Tesla is far from ready for that. This will hurt Tesla model S and particularly model 3, no doubt about it, but the profits are at the high end for Tesla, so at the end, its effect will not be apparent except in a high model X ratio to everything else Tesla.

Some rules in China change fast, but China (like Trump) seeks her own people's employment above pretty much everything else. EVs have long been a way around ICE legislation in China, there are perhaps 200+ million mostly Pb based EVs in China of various 2,3 and 4 wheeled varieties, predominantly as a way around vehicle legislation. (unintended consequence)

 

[neroden]

No I don't read Chinese, I use google translate.

I had trouble finding the right pages. Google translate was not helping me navigate through the links on the Chinese government websites to find the right documents. :-( Congratulations on your better navigation.

1)China's ZEV credits are very tradeable, that is the point, no fines, just stop sales until sufficient credits are bought. brutal and simple
1) i suspect China's CAFE has fines, which is gentler than no fines.

2) Foreign car companies can easily get any, if their chain from cell to pack to car is compliant. If Tesla to use perhaps BYD 18650's then it probably easy for Tesla to be compliant, but using Tesla 18650's not a chance. For example Nissan is famous for targeting a $8,000 EV for China, that will use local cells, packs, etc etc etc Renault-Nissan's Ghosn eyes $8,000 EV for China

http://europe.autonews.com/article/...renault-nissans-ghosn-eyes-$8000-ev-for-china

I think Tesla will be using Tesla cells. I know Tesla can now legally build a wholly-owned battery factory in China. They will probably simply do so. I'm still not clear on whether they can set up a wholly-owned car factory (it would be a bit funky if they exported the batteries and reimported the cars...)

3)China really really really wants to consolidate its car industry into fewer stronger players, this EV game is yet another backdoor for more, weaker players. I suspect the route will be for Chinese EV makers is to buy a Chinese ICE manufacturer, or just die. I think Tesla can set up another li ion battery factory in China, just another of many Chinese battery gigafactory. But the sourcing of the cathode and anode will need to Chinese approved, Tesla is far from ready for that.

Really? I mean, at the Gigafactory they build everything strictly from raw bulk materials, right? How hard is it to get Chinese lithium, cobalt, nickel, aluminum, graphite, etc? I think China has mines or at least refineries for all of those. That can't possibly be difficult, can it? That sounds like quite possibly the easiest part.

Getting an exemption from the "joint venture" rules for the car factory sounds like the hard part...

To be clear, I'm only considering the scenario of Tesla selling ZEV credits in China after they get their local manufacturing built. If they are producing domestically, exempt from the tarriffs, and selling ZEV credits, it could be seriously profitable.

 

[renim]

what is a raw material? China imports a lot of raw material from Australia, Congo, New Caledonia etc
Gigafactory is somewhat downstream, Tesla does not process crude oil into anode powder, Tesla does not process Nickel ore into cathode powder. Gigafactory is about 1/2 a step upstream compared to a Nissan Smyrna.
There seems considerable impurity difference in the hard rock li that China uses and the li brine that Japan/Korea use. For a quality product, Tesla can't just waltz over and use Chinese/Australian lithium just as Chinese can't waltz over and use South American brine lithium.

not insurmountable, but there are many steps to go from 'here to there'

 

[dc_h]

Saudi's shuffle chairs on Titanic and request a new song list.

Saudi Reshuffle Could Completely Shake Up Oil Markets | OilPrice.com

 

[jhm]

Saudi's shuffle chairs on Titanic and request a new song list.

Saudi Reshuffle Could Completely Shake Up Oil Markets | OilPrice.com

One thing I don't get about the Aramco IPO is why they think it is so important to push the price of oil up in advance of the IPO. Clearly, the Saudis have been bending over backwards to prop up the price, but it's not working. So now Aramco just looks inept. How stupid do they think investors are! What makes Aramco valuable is not that the price of oil is high, but that they can grow supplies at lowest cost. What they should show investors is how low they can go, how they can undercut US shale. As investors fleet unprofitable oil stocks, they could be attracted to Aramco. Instead Aramco is hoping to fool investors into thinking oil is still a premium commodity. It's far too late for that.

 

[dc_h]

One thing I don't get about the Aramco IPO is why they think it is so important to push the price of oil up in advance of the IPO. Clearly, the Saudis have been bending over backwards to prop up the price, but it's not working. So now Aramco just looks inept. How stupid do they think investors are! What makes Aramco valuable is not that the price of oil is high, but that they can grow supplies at lowest cost. What they should show investors is how low they can go, how they can undercut US shale. As investors fleet unprofitable oil stocks, they could be attracted to Aramco. Instead Aramco is hoping to fool investors into thinking oil is still a premium commodity. It's far too late for that.

I think they were just a year too late to market. They have lost control and the only event that is likely to push up the price of oil is something very bad that will shut down production for a country.

 

[neroden]

I think they were just a year too late to market. They have lost control and the only event that is likely to push up the price of oil is something very bad that will shut down production for a country.

I don't even think shutting down Venezuela or Nigeria would make a difference; it would have to be a bigger-production country.

 

[jhm]

I don't even think shutting down Venezuela or Nigeria would make a difference; it would have to be a bigger-production country.

Hmm, raises an interesting question, Under the reserve liquidation hypothesis, what would we expect to happen if a Venezuela or Nigeria shut down production? The basic motive that all large reserve holders have is to maximize near term revenue from reserves, i.e., liquidation. If some 1 mb/d of supply were arbitrarily taken out of production, the motive to liquidate remains. In the short-run, prices go up a little, and production increases at least 1 mb/d elsewhere. Then price falls back again to the point that major reserve holders refrain from growing supply. So I think the answer is that as a Venezuela or Nigeria falls out of production, it is replaced within a year, and oversupply persists.

I suspect, you would need to knock enough reserves perpetually out of production to reduce the R/P from around 60 years down to 30 to 40 years. A mild demand decline of 2% per year for the next 100+ years would be sustained indefinitely with just a 50 R/P (= 1 / 2%). But once new ICE is completely replaced with batteries, oil demand can fall at 4% or more per year. Thus, a R/P ratio of 25 years (= 1 / 4%) would hold out indefinitely.

But this idea of knocking reserves "perpetually" out of production is a bit silly. Even if Venezuela halted production for 20 years, the oil reserves would still be there, and somebody would know where to find them. So it is silly to think that these reserves fall off the list of known reserves. So when analysts track R/P, the "R" reserve part does not change when the "P" production part is taken as zero. In the liquidation hypothesis, it is the excess aggregate reserves that drives the liquidation. That excess does not go away just because production falls somewhere on the planet. Aside from production, the only thing that reduces the size of proven reserves is for the price of oil to fall low enough to make some of it uneconomical to produce. So if the price fell enough to reduce R/P to 30 to 40 years, the liquidation motive would mostly evaporate, but then the price of oil would be really small. Indeed, it is this potential for prices to fall enough to drive down R/P ratios that motivate the liquidation in the first place.

Honestly, I think the Saudis should just keep growing production and revel in the fact that their reserve is the largest and lowest cost reserve in the world. One way or another this will shrink R/P to the point that oversupply will be halted. Another way to understand this glut is that we have a glut of reserves that can only be resolved by decline in price. Until the glut of reserves is resolved, the glut of production will persist.