Shorting Oil, Hedging Tesla

[EinSV]

I think you did miss something. I don't remember where I read this, but it said specifically that they were talking to Shanghai about a partnership with a government owned firm, and considering the Shanghai Port Authority as a partner, but that they had explicitly rejected SAIC. This was specifically sourced to an anonymous leaker inside the Shanghai government, so take it for what it's worth, but that's an awfully specific claim.

And the claim fits with Tesla's attitude, to my mind: they don't want any connection with a company which makes ICE cars. (They might feel differently about an electric-only local company.)

OK I see the source of confusion. Correctly or incorrectly, I read your initial post together with @renim's to suggest that Tesla and China were at some sort of impasse and I have not seen a credible report of that (there was some misinformation being circulated by shorts on Thursday when the China news was breaking, before the Bloomberg story came out).

I did see the reports that Tesla had rejected SAIC or other Chinese automotive companies as partners. I have not seen any credible reports that China is insisting that the Chinese partner must be an automotive company and discussions seems to be moving forward as far as I can tell from published reports.

 

[adiggs]

This looks like an article we're going to get to read repetitively for at least a decade:
Underperforming Energy Sector May Soon See M&A Wave | OilPrice.com

Oversold! Great deals! M&A!

 

[Off Shore]

Let's see.... buy high...

Sell higher.

 

[jhm]

As Oil and Gas Faces a ‘Last Cycle,’ a Generational Divide Emerges Over Its Future

E&Y has done a survey on attitudes about energy. Word is everybody likes renewables.

 

[generalenthu]

http://www.carbontracker.org/wp-con...2D-of-separation_PRI-CTI_report_correct_2.pdf

This report from carbon tracker is worth discussing. They look at oil and gas projects at 69 of the largest oil and gas companies. They place these on a supply cost curve by breakeven price. From this they are able to determine the price level below which projects are consistent with a 2D (2 degree centigrade) climate scenario and above which are in excess of hitting the 2D scenario. So in a rational process none of the projects above that 2D threshold would ever get done. This is about 1/3 of capital for all projects.

What I found most interesting was the last section on NPV sensitivity to the average price of oil from 2017 to 2025. At $60/noe, the 2D compliant projects have an NPV of about $0.3T (assuming 10% diacount), while the NPV of BAU pursuit of all projects have an NPV of -$1.1T. That is, the inclusion of projects not within the 2D scenario destroy some $1.4T of value with the price of oil at $60/b (Brent). At $40/b, even the 2D consistent projects have a negative NPV, -$0.25T. For BAU to breakeven, oil needs to be at $80/b, but even here 2D compliant only has greater value than BAU, $1T vs $0.2T.

So this drives home the value of a controlled wind down of the industry. If there is a way of coordinating to avoid projects above the 2D mark, then prices need not collapse under excessive oversupply and what is left is of higher NPV even if there were no impact on prices. This seems to go a long ways toward why it is in the interest of oil companies to have the US continue to participate in the Paris aggreements.

But looking at raw economics, this report also suggests that the above 2D projects are already a loss, and pursuing them would only destroy more value for all market producers. If the average oil price remains below $60/b. This whole oil industry is just about worthless on an NPV basis. This of course is assumming that some projects with breakeven prices above $60/b are in fact pursued. But this is a verey real risk for all participants that remain in the market. A perpetual oil glut is a negative sum game. This should be sobering enough, even if climate change were a non-issue.

The positive side to this analysis is that if EVs and other means of cutting demand can keep the price of oil below $60/b, then economic forces will tend to reduce the supply to a point below a 2D scenario. While the price is below $50/b, only the most stupid players would even consider projects with a breakeven above $60/b. And the stupid will be rightly punished if prices remain below $60. The 2D threshold is about $85/b.

So this is the basic challenge for Tesla. It does not have to replace all this oil; rather, it merely needs to soften demand enough that the price of oil stays below $60/b. Eventually low oil prices will lead reductions in supply, and reductions in combustion will follow. And oddly enough, any producer that increases supply below $60/b is also helping to put a cap on oil prices, minimize malinvestment, and buying time for EVs to catch up on volume displacement.

I have to disagree with this line of thinking. if it is possible that oil could be pumped at less than $60 per barrel in sufficiently large quantities this analysis equating price with a cap on supply will fall apart. In fact this is exactly what Saudi Arabia can do with its really cheap to recover reserves of oil.

Also it needs to be noted that the OPEC countries have an incentive to pump more oil at a lesser price to make sure their budgets are balanced.

 

[jhm]

I have to disagree with this line of thinking. if it is possible that oil could be pumped at less than $60 per barrel in sufficiently large quantities this analysis equating price with a cap on supply will fall apart. In fact this is exactly what Saudi Arabia can do with its really cheap to recover reserves of oil.

Also it needs to be noted that the OPEC countries have an incentive to pump more oil at a lesser price to make sure their budgets are balanced.

I think you may have missed how this analysis was set up. They looked at all potential projects, including those of Aramco. They sort this out by breakeven price. This is a supply curve. The 2D projects are the projects with the lowest breakeven. If the industry were only to produce these, then the average supply is just 85 mb/d from 2017 to 2035. This average supply is well below current production. Thus it implies that production peaks and declines substantially before 2035.

So this draws the line in terms of profitability. But it does not explain how holding this line can be accomplished. This is where I am making my own inference that if the price of oil stays below $60 (which is well below many of the 2D projects) that this should suffice minimize the engagement of projects with breakeven prices well above $60.

So what you are suggesting is that the analysis failed to account for the full range of projects available to Aramco. That may be true. I cannot vouch for their methodology or analysis. But in principle they claim that they have evaluated this potential and found it to be of limited size.

Taking their analysis at face value, it does seem to suggest that the best thing the Saudis can do to minimize climate change would be to maximize their production as soon as possible. This may seem counterintuitive, but what it would do is drive down the price of oil so low that few projects with breakeven over $60 would ever be engaged. And a price of oil below $80 would be insufficient to keep growing production for the next 18 years. And keeping oil below $60 would definitely reduce production.


I'm increasing becoming aware of a subtle contradiction or weakness in scenarios that place peak demand well past 2030. Thes scenarios simply extrapolate consumption growth rates inbthe face of slow moving growth in EVs and higher mileage vehicles. The tacit assumption being made is that oil prices will return to high enough levels to grow the supply fast enough to keep pace with this consumption trajectory. Indeed, this belief is so strong among some analysts that they view the consumption trajectory as a driver for why the oil price must ultimately recover, i.e. rise high enough to push production above 100 mb/d. But this begs the question, is demand really strong enough to push production well above 100 mb/d. It's all well and good to argue that if the price of oil stays low enough, say below $60, that consumption can grow in excess of 100 mb/d. But it does not hold that if the price if oil remains below $60, oil production will grow to exceed 100 mb/d. So you can't have a valid scenario where demand needs a lower price than supply needs to hit some combined production and consumption numbers. I have yet to see any advocates of sustained growth (anti peak demand) explain why they think consumers will be willing to pay in excess of $80 to grow supplies to ever rising levels.

 

[SebastianR]

I'm increasing becoming aware of a subtle contradiction or weakness in scenarios that place peak demand well past 2030. Thes scenarios simply extrapolate consumption growth rates inbthe face of slow moving growth in EVs and higher mileage vehicles. The tacit assumption being made is that oil prices will return to high enough levels to grow the supply fast enough to keep pace with this consumption trajectory. Indeed, this belief is so strong among some analysts that they view the consumption trajectory as a driver for why the oil price must ultimately recover, i.e. rise high enough to push production above 100 mb/d. But this begs the question, is demand really strong enough to push production well above 100 mb/d. It's all well and good to argue that if the price of oil stays low enough, say below $60, that consumption can grow in excess of 100 mb/d. But it does not hold that if the price if oil remains below $60, oil production will grow to exceed 100 mb/d. So you can't have a valid scenario where demand needs a lower price than supply needs to hit some combined production and consumption numbers. I have yet to see any advocates of sustained growth (anti peak demand) explain why they think consumers will be willing to pay in excess of $80 to grow supplies to ever rising levels.

What you describe comes out really well in many comments / posts. Take for instance this one here: The World Is Millions Of Barrels Away From Peak Oil | OilPrice.com

It has this chart:

And it is true that demand in the past went up (almost) no matter the price. I guess this is where the thinking is coming from.

 

[jhm]

What you describe comes out really well in many comments / posts. Take for instance this one here: The World Is Millions Of Barrels Away From Peak Oil | OilPrice.com

It has this chart:

And it is true that demand in the past went up (almost) no matter the price. I guess this is where the thinking is coming from.

Ha, you caught that I was first to post?

Anyway this article indicative of the naivety of the argument. It amounts to "look at the trend" followed by "it's gonna continue that way." Of course, there is this glaring exception about how the slope fundamental shifted in the 1970s. Moreover it is problematic that consumption growth has been linear for the past 30 years, while global GDP has been exponential. Linear means that the growth rate has been declining each year for the last 30. It is not so linked to the economy as to grow with the economy.

I believe what we see here is actually controlled supply. OPEC has been managing the supply for quite some time. They screwed up in the 1970s and destroyed demand. It is questionable whether OPEC can continue to manufacture this linear trajectory. A few years out from now we may see the consumption line break. As it falls off from its linear path, this sort of argument (from demand bulls) will fall apart.

 

[jhm]

Statistical Review of World Energy | Energy economics | BP Global

Well the new 2017 BP statistical review is out, and I'm starting to mine it. First up, diesel.

World diesel consumption fell 128 kb/d or 0.5% in 2016 y/y. The developed (OECD) countries had level consumption, so all the decline came from non-OECD countries. Notably, diesel fell 232 kb/d, -6.5%, in China. From 2005 to 2015, diesel has grown annually by 417kb/d globally, -30kb/d in OECD, 448kb/d non-OECD, and 132 kb/d in China. So the decline, -0.5%, this year is will below that average increase, 1.7%.

Certainly lots of factors can impact diesel consumption. Economic growth in construction, mining, transportation etc. But also expansion of the grid, solar and batteries can displace diesel generation. CNG and LNG vehicles can compete in heavy vehicle transport. But the 6.5% fall off in China is notable for it's abruptness. It is at a five-year low for China. Also fuel prices have been low through 2016, so it is not likely a price response.

Could it be that EVs are starting to make an inroad into Chinese demand for diesel? Well, in 2015 there were 94k electric buses added to China's fleet and 116k added in 2016. If we take the average and assume displacement of 10k gal/year/bus, we get an expected impact of 68 kb/d. Thus, electric buses explain about 30% of the decline in consumption of diesel in China.

Consumption was up only 35kb/d in 2015 over prior year. So an impact of 68 kb/d would have been enough to decrease consumption even a year earlier had the production been scaled up higher in 2014. So we are very much at a tipping point where EVs are critical.

Going forward I would expect the displacement from electric buses, semis and other heavy vehicles to nearly double each year across the globe. So it will become increasingly difficult for diesel demand growth to overwhelm the EV displacement, 140 kb/d in 2017, 280 kb/d in 2018, and 560 kb/d in 2019. So even if demand growth went back to what is was from 2005-2015, 417 kb/d/year, EV displacement would wipe it out by 2019.

So there is definite possibility that 2015 may stand as the year that global consumption of diesel peaked at 27.617 mb/d. 2005 stands as the year that fuel oil peaked at 9.9 mb/d, now 8.0 mb/d. But fuel oil was just 11.7% of consumption at the time. In 2015, diesel was 29.1% of consumption and has fallen to 28.5% in the following year. Diesel consumption stands at 27.5mb/d, but not for long.

 

[adiggs]

Statistical Review of World Energy | Energy economics | BP Global

Well the new 2017 BP statistical review is out,....

Good stuff @jhm. For those interested in energy numbers, following the link will get you to a web page with a link to a spreadsheet with BP's numbers going back to 1965 (through 2016). Looking only at the worldwide primary energy supply numbers, they are close enough to the EIA numbers I've used previously (BP is consistently lower by around 5-10%). Consistency is the key though, matched up with higher availability / usability - I'm going to switch to this data for energy system type conversations and observations.

The one problem is that I don't see final energy consumption numbers, so that's a problem. Some of the individual energy sources have consumption numbers (solar and wind for instance).

H'mm - that's unfortunate.


Thanks for posting this.

 

[neroden]

I
I'm increasing becoming aware of a subtle contradiction or weakness in scenarios that place peak demand well past 2030. Thes scenarios simply extrapolate consumption growth rates inbthe face of slow moving growth in EVs and higher mileage vehicles. The tacit assumption being made is that oil prices will return to high enough levels to grow the supply fast enough to keep pace with this consumption trajectory. Indeed, this belief is so strong among some analysts that they view the consumption trajectory as a driver for why the oil price must ultimately recover, i.e. rise high enough to push production above 100 mb/d. But this begs the question, is demand really strong enough to push production well above 100 mb/d. It's all well and good to argue that if the price of oil stays low enough, say below $60, that consumption can grow in excess of 100 mb/d. But it does not hold that if the price if oil remains below $60, oil production will grow to exceed 100 mb/d. So you can't have a valid scenario where demand needs a lower price than supply needs to hit some combined production and consumption numbers. I have yet to see any advocates of sustained growth (anti peak demand) explain why they think consumers will be willing to pay in excess of $80 to grow supplies to ever rising levels.

Yep. This is the error most of the oil analysts make. It's why I've been repeatedly calculating the "price of substitution", the price of oil at which demand is destroyed because the alternatives are cheaper. This is the driving force of the oil market long term.

For large airplanes, the price of substitution is still infinite. We don't hjave a substitute. Well, I guess there are biofuels -- anyway, you can look up those prices, they come out in excess of $100/bbl.

But for cars, the price of substitution is now getting crazy low. Way lower than the current oil price. $20/bbl or so. This means substitution is limited entirely by production capacity of electric cars, which is why I turned to that.

The overall electric car market has been growing by about 50% per year. I wonder if it's possible to speed that up? It would require a lot of capital. This *is*, however, Tesla's stated mission. How fast can they build new factories if they really try to go as fast as is humanly possible? How much dilution will this require?

 

[neroden]

Going forward I would expect the displacement from electric buses, semis and other heavy vehicles to nearly double each year across the globe. So it will become increasingly difficult for diesel demand growth to overwhelm the EV displacement, 140 kb/d in 2017, 280 kb/d in 2018, and 560 kb/d in 2019. So even if demand growth went back to what is was from 2005-2015, 417 kb/d/year, EV displacement would wipe it out by 2019.

Oh, this is fascinating. So the year I've been calculating is the year when demand reduction exceeds supply reduction. I was basing this on an assumption that exploration would end first, and then the old wells would be pumped, following decline curves.

But if this happens as early as *2019*... well, the reckless, financially irresponsible expansion of oil supply is still going and looks like it will still be going through most of 2018 at least. So we could be witnessing peak demand while the crazy drilling boom is *still going on*. This would lead to a real, *massive* crash in the oil price. After a few waves of bankruptcies, this would actually slow down the transition to electric cars (if oil dropped below $25, 40 mpg cars would be competitive; if it dropped below $10, 30 mpg cars would be competitive; below $3/bbl, average cars would be competitive; et cetera).

But I guess this is peak *diesel* demand. Peak gasoline demand would probably be later. So this will cut oil company profits but not hurt as much as peak gasoline demand.

 

[jhm]

So Peak Diesel Demand may well be in the past. We only have 2 or 3 years with a nontrivial chance of ever seeing the peak rise any higher. By 2019 or at least 2020, there will be too many heavy electric vehicles (and solar+battery) for ordinary demand growth to rise to a new high.

So what we see here is that the peak for a given fuel can actually occur several years before EV displacement seals the deal. So our effort to model when EVs would displace a critical level of consumption are likely overstating the time to peak. This is especially true for those analysts who want to argue that the crude peak is more than ten years away.

But how will the diesel peak impact the oil market? I think we need to explore this. But at this point I would suspect that the diesel peak can change the nature of the debate about peak crude demand. Diesel is a significant product about 29% of the value of a barrel. If diesel is understood to be in decline and that EVs are reach sufficient scale to lock in that decline, then it will be much harder for the market to simply dismiss the risk of peak oil. I'm looking forward to trolling peak demand critics by saying, "What about diesel? When do you think we'll see an new peak for diesel?" But moreover, it will illustrate what a peak looks like. "Can you imagine the price of diesel dropping low enough that consumption would reach a new peak? Would it be worthwhile to lower the price of diesel?" And finally, it sets up the question, "Sooooo, when do you think gasoline consumption will peak? Will crude demand keep going up past peaks for both diesel and gasoline?"

So I'd like to challenge us to model peak gasoline. I'll be working with the BP data to better frame that. We also need to think about how declining diesel demand impacts the economics of oil products. I do expect that jet fuel will be the last to peak, but suspect that crude demand will fall before that. What sort of economic chaos will fall on the heels of peak diesel and peak gasoline?

 

[TheTalkingMule]

Oil glut increases by 118k barrels........oil up 1%. OOOOOkay

 

[jhm]

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

EIA Weekly is pretty flat this week, which is likely a relief to oil traders. Crude stocks up just 0.1 mmb total petroleum stocks up just 0.8 mmb.

Net imports are back down 1012 kb/d w/w and 1741 kb/d y/y.

Likewise the bizarre uptick in products supplied last week has been resolved. Products supplied are down 1421 kb/d w/w and 1502 kb/d y/y. So total US consumption is still on track to decline 2.7% annually.

About half of the decline in net imports, 1130 kb/d (4-week averages), is due to decline in domestic consumption, 553 kb/d. The other half is due to increase in domestic production of crude, 662 kb/d.

Domestic crude production is down 100 kb/d w/w. Perhaps we are just starting to see a response to oil prices in the low $40s.

On the whole, the market looks nearly balanced. $45/b may not be that bad for a while. Demand for export products may be key to sustaining this price.

 

[adiggs]

$30 Oil Could Spark Contagion In Energy Markets | OilPrice.com

Clearly this author and I have different mental models of the big scale economic ramifications of lower and sustained oil prices. From the article:

In early 2016, when oil prices dropped below $30 per barrel, it started to drag down stock indices around the world. Some are even speculating that the latest downturn in prices is not just a problem for the high-yield market, but perhaps an indicator of a coming economic recession.

Where I'm thinking that sustained lower priced oil, for the overall economy, sounds like cheaper cost for energy inputs, lower inflation, and a source of overall economic expansion. Even if/while it hurts the energy miners and their financiers.

I realize that lower prices, carried on long enough, in a rising volume demand environment will eventually leave us short of energy. That's a mental model from the past that might have 1 more gasp in it - mostly it looks to me like old thinking in a new energy landscape where substitutes exist and are being deployed rapidly.

 

[jhm]

Statoil: U-turn on EVs?

Statoil comes to see crude peak in the 2020s and 200 million EVs by 2030. This is a 39% cagr for the EV fleet. This is a pretty good rate for an oil company. The mistake they may be making, however, is to imagine that EV cost parity in 2025 delays the swift ramp up. I'm not persuaded that cost parity is all that critical. Near parity has a lot if demand already. Furthermore, electric buses and soon semi are below parity on TCO basis, which is sufficient to flip demand in commercial fleet markets.

As for one last gasp of tight oil squeezing out high oil prices, it would be amusing to see a race of oil companies trying to build out deep water resources before EV makers can build out a fleet of commercial vehicles sufficient to displace the deepwater supply. Remember 400k electric semis can displace 300kb/d of diesel consumption. Tesla could knock that out in a year if trucking clients were sufficiently motivated by pricey oil. How many years does it take to bring 300 kp/d of deepwater online? So I'd love to see the head to head competition.

 

[ValueAnalyst]

Check this out: News - Argus Media

Saudi exports to the US will decline to three-decade lows for the coming three months.

 

[ggies07]

Statoil: U-turn on EVs?

Statoil comes to see crude peak in the 2020s and 200 million EVs by 2030. This is a 39% cagr for the EV fleet. This is a pretty good rate for an oil company. The mistake they may be making, however, is to imagine that EV cost parity in 2025 delays the swift ramp up. I'm not persuaded that cost parity is all that critical. Near parity has a lot if demand already. Furthermore, electric buses and soon semi are below parity on TCO basis, which is sufficient to flip demand in commercial fleet markets.

As for one last gasp of tight oil squeezing out high oil prices, it would be amusing to see a race of oil companies trying to build out deep water resources before EV makers can build out a fleet of commercial vehicles sufficient to displace the deepwater supply. Remember 400k electric semis can displace 300kb/d of diesel consumption. Tesla could knock that out in a year if trucking clients were sufficiently motivated by pricey oil. How many years does it take to bring 300 kp/d of deepwater online? So I'd love to see the head to head competition.

That is for the Reform situation though.....Do you think we are in one now though? I browsed Statoil's PDF and it seems like we are in a Rivalry right now...I mean, I get the end result and what is happening, just wondering if their three different scenarios mean anything.....

Rivalry portrays a multipolar world where populist, nationalist, inwardlooking and short-term priorities direct policy making, where climate scepticism runs high and where disorder, conflict and power struggle apply at the expense of cooperation and trust

The geopolitical scene in Rivalry is turbulent. Economic inequality within and between states erodes social and international cohesion. Conventional politics and principles are overrun by xenophobia and protectionism.

 

[jhm]

That is for the Reform situation though.....Do you think we are in one now though? I browsed Statoil's PDF and it seems like we are in a Rivalry right now...I mean, I get the end result and what is happening, just wondering if their three different scenarios mean anything.....

I've been scanning the pdf. There is quite alot there.

My reading is that the author views Reform as the base line scenario. It takes recent trends in the economy and technology as continuing into the future. But these trends are not sufficient to meet a 2D climate scenario. The reform scenario is not strongly influenced by politics. Renewal and Rivalry depart from Reform by intrusion of political forces. In Renewal the political movement is toward greater international cooperation that takes seriously the need to address climate change. Conversely, Rivalry is characterized by a break down of international cooperation, global trade and regard for climate change. So Rivalry is dystopian where Renewal is somewhat utopian, but Reform seems to be the present path of things.

It can be worthwhile thinking through various strategies for clean technology within each scenario. For example some technologies seem rather dependent on being in a Renewal scenario. Think of CCS. It's not working out economically. Moreover it is not clear how CCS creates value apart from reducing emissions. So CCS is not a robust solution. However, advancements in batteries create substantial economic value in all three scenarios. For example, consider China in the midst of a Rivalry scenario. Batteries give China a key technology for substituting local renewable energy for fuel imports. Additionally it capitalizes on their manufacturing prowess to overcome a lack of fossil resources. In a Rivalry world, I don't see how China would want to be dependent on importing fossil fuels to power their economy. Where Rivalry runs into trouble is that China may be more inhibited from exporting batteries to the rest of the world as global trade breaks down. So let's consider Musk's ambition to set up regional manufacturing to serve regional demand for Tesla products. In a Renewal scenario, this may not be necessary. But in a Rivalry world, it is quite necessary. The break down of global trade suggests that you want to emphasize domestic production everywhere.

Frankly I am optimistic about Tesla's role in every scenario. CCS and nuclear are falling, but the reason is that their are cheaper alternatives to baseload power. Solar paired with 4 hours of batteries is dropping below 10c/kWh and will continue to decline 10% to 20% each year for quite a while. This prices coal with CCS out of the market, and soon it will price coal without CCS out of the market as well. So lower cost, cleaner technology makes all these scenarios better.