Shorting Oil, Hedging Tesla

[jhm]

World Energy Investment 2017 : Key Findings

IEA puts out its energy investments report. Investment in oil and gas fell 26% from $873B in 2015 to $649B in 2016.

Investment in electricity exceeded that of oil and gas for the first time. Of the $717B invested in electricity only 20% went to thermal generation. 41% went to renewables and the remaining 39% to networks. Grid storage, a component of networks, reached a new high of $1B.

My view is that capacity to build batteries is the single most important investment to be making. Renewable investments in $B is at a plateau. Batteries are the essential element to bring renewables into transportation while accelerating renewables in electricity. Batteries are critical for assuring that oil, gas and coal investments can continue to fall while electricity investments stay strong.

 

[neroden]

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This article examines the Aramco quotes from another angle.

Perhaps Amramco just wants to look relevant when it IPOs. The target seems to be the financial sector which is becoming less inclined to invest in big oil projects. I think they need to focus on selling their own investments and stop badgering the rest if the industry. A $1T investment when oil is just at your break even price is a bad investment. If Aramco has lower breakeven prices they should lead on it rather than withholding supply and engendering a risk of lower prices.

Yep. They waited too long. They could have IPOed last year while talking about increasing investment. Not sure they'll be able to do so now.

The financial industry rewarded Suncor for declaring that it would never explore for oil again. A similar declaration by the Saudis would probably net them a good IPO... but I think they're so behind the curve that they won't make that statement.

 

[jhm]

Commentators who don't understand the grid should butt out of the battery debate | Ketan Joshi

I would have FAXed this to you all, but sadly my smart phone does not FAX. Obviously a doomed technology.

Excellent and informative read.

 

[jhm]

I think oil is poised for a tumble again today. The 18 mmb surge in products supplied needs to work out. So this could easily put 9 or more mmb of back pressure on inventory. API has posted a big draw, which has boosted the price. But I am expecting a surprise build in total products. We shall see in about an hour.

 

[luvb2b]

so do i read this correctly that the 7.x million draw from eia is offset by builds of about 5m in various finished products? and would that be read as a mild positive then?

I think oil is poised for a tumble again today. The 18 mmb surge in products supplied needs to work out. So this could easily put 9 or more mmb of back pressure on inventory. API has posted a big draw, which has boosted the price. But I am expecting a surprise build in total products. We shall see in about an hour.

View attachment 235273

 

[ValueAnalyst]

Read the EIA report I linked to. "Products Supplied" is the next to last box on the first page. This section accounts for products that are being supplied to retail distribution channels. It is considered a measure of domestic consumption, and ultimately it will be consumed. But even retailers have some storage capacity which can be exploited for getting inventory out of the commercial lots.

So if inventory is piling up in retail channels, it could indicate logistical problems or it could be an effort of manipulate the market. I do not know which is happening. But even logistic problems are not a good basis for bullishness about commercial stocks. When retailers sit on too much inventory, they will eventually have to pull back on future deliveries. So in the next week or two we could see this reverse. Products Supplied will decline, and stocks may well build again. Once the market figures this out the price of oil will drop.

This is why I worry about market manipulation as a source. Traders in on the scam can make money on the price upswing right now, and then short to make money as it falls apart. Even so, it is possible that logistical problem are the root here.

US Gasoline demand seems to have continued to increase and is at record level for this week of the year. More SUVs = more demand. BEVs won't start affecting gasoline demand increase, even in OECD, until 2025+

agreed?

 

[ValueAnalyst]

I think oil is poised for a tumble again today. The 18 mmb surge in products supplied needs to work out. So this could easily put 9 or more mmb of back pressure on inventory. API has posted a big draw, which has boosted the price. But I am expecting a surprise build in total products. We shall see in about an hour.

View attachment 235273

No surprise build. In fact, a 10 mb total oil draw vs. seasonal slight build for this time of the year.

Products supplied seems to have normalized this week, and oil inventories still printed a large total draw.

Do you now agree with me that there is an ongoing supply shortage in the oil market?

Note that SPR sales will disappear until November.

3Q17 seems to be shaping up bullish for oil prices, which is supportive of TSLA.

 

[jhm]

The EIA Weekly is out, Weekly Petroleum Status Report.

Crude stock -7.6 mmb
Total stock -3.9 mmb
Chg Net Import -1.116 mb/d or -7.8 mmb/week
Chg Prod Supplied -2.267 mb/d or -15.9 mmb/week

This is a moderate draw on total stock. Enabling this was a decline of net imports, -7.8 mmb for the week vs. -3.9 mmb for total stock.

Excess supplied products from last week has reversed itself. It was +18.l mmb last week and -15.9 mmb this week.

I'm not sure how the market will react to the idea that changes in net imports are balancing the US market. This has been the intent of Aramco in withholding imports from the US, and US refiners are also eager to be increase exports.

Changes in import/export

Imports crude -132 kb/d, -1.7% w/w
Exports crude +150 kb/d, +19.5% w/w
Net Imports crude -282 kb/d, -2.0 mmb/w

Imports products -480 kb/d, -21.0% w/w
Exports products +354 kb/d, +8.1% w/w
Net Imports products -834 kb/d, -5.8 mmb/w

Net Imports Crude & Products -1116 kb/d, -7.8 mmb/w

So it looks like the impact of Aramco withholding imports is modest, while increased crude exports had a slightly bigger effect. The most abrupt change was to imports of refined products, -3.36 mmb for the week. This reduction of imported products could be due to the excess of products supplied the week before. This was about half of the total reduction in net imports. So the real hold up here is around supplying the domestic market with refined goods. There is only so much consumption actually happening.

I still get the impression that supply is just be shuffled around in the system to make commercial inventory levels look better. Perhaps this is just a balanced market with a lot of noise around net imports and products supplied. There's a lot of inventory moving around, but actually US consumption appears to be in annual decline. Will exports continue to fetch a high enough price to keep reducing total stock.

 

[jhm]

Top Oil Traders Sell Bespoke Crude From a Supermarket at Sea

This is an interesting development, a floating oil supermarket.

 

[jhm]

so do i read this correctly that the 7.x million draw from eia is offset by builds of about 5m in various finished products? and would that be read as a mild positive then?

Did my previous message answer your question? I was expecting change in products supplied to reverse course, and that happened. I further speculated that total stock might prove to be a build. Indeed, that was wrong. It was a 3.9 mmb draw. Given that we are in peak demand season right now, a 3.9 mmb draw is good, but not spectacular.

 

[jhm]

US Gasoline demand seems to have continued to increase and is at record level for this week of the year. More SUVs = more demand. BEVs won't start affecting gasoline demand increase, even in OECD, until 2025+

agreed?

No, weekly product supplied numbers are too noisy to draw conclusions about secular trends in consumption. You need to compare at least rolling 12-month volumes to begin to get a sensible read.

 

[ValueAnalyst]

No, weekly product supplied numbers are too noisy to draw conclusions about secular trends in consumption. You need to compare at least rolling 12-month volumes to begin to get a sensible read.

Hmm... that's not what you said last week when the data swung the other way...

US Gasoline demand is at record level for this week of the year. This is in line with back-to-back record SUV sales in 2015 and 2016, even though 2017 YTD have been lower. The US fleet has clearly shifted more towards SUVs in the last 2.5 years as oil prices slumped.

Combined with high consumer confidence, very low unemployment rate, and GDP doing fairly well, would you agree that US gasoline demand will continue to grow until BEVs actually start proliferating? BEV sales are too low to have an effect before the next decade.

 

[jhm]

Hmm... that's not what you said last week when the data swung the other way...

US Gasoline demand is at record level for this week of the year. This is in line with back-to-back record SUV sales in 2015 and 2016, even though 2017 YTD have been lower. The US fleet has clearly shifted more towards SUVs in the last 2.5 years as oil prices slumped.

Combined with high consumer confidence, very low unemployment rate, and GDP doing fairly well, would you agree that US gasoline demand will continue to grow until BEVs actually start proliferating? BEV sales are too low to have an effect before the next decade.

I think you misunderstand. If you look at the 4-week averages or cumulative average, these are both down for the year, -0.3% and -2.6% respectively.

It's never been clear to me what period the cumulative daily average is based on. So I have gone back to underlying weekly data computed my on 52-week averages ending July 8, 2017 and July 9, 2016. These are 9,220 kb/d and 9,315 kb/d, respectively. So here we see that annual gasoline consumption is declining, -95 kb/d or -1.02% y/y. In that time frame, the average retail price of gasoline has risen from $2.30/gal to $2.40/gal, a 4.1% nominal increase, while inflation rose about 2%. Thus, we have a real price increase of 2.1% paired with a consumption decline of 1%. So either demand has become very price elastic or the US economy simply needs less gasoline. Either way it would be a decline in economic demand.

By contrast, in the preceding year consumption grew 3.1% while the price of retail gasoline fell 20% nominally. This looks like a simple price elasticity response: consumers bought more because it was cheaper. It is harder to tell if the economy really required a greater quantity because this is masked by price response.

I sure looks to me like US demand for gasoline is in decline. The only way to increase consumption is to cut prices (last year). But raising the price of gasoline 4% is met with a 1% reduction in consumption (this year). So the oil industry is going to have to decide if they want to accept low prices to sustain consumption or hold out for higher prices at a loss of consumption. This conundrum is the consequent of a decline in economic demand. Whether consumption rises or falls depends on how much supply hits the market. This is why I make the distinction between demand and consumption. It appears that US gasoline demand is in decline, and with retail at $2.40/gal, consumption is declining too.

 

[ValueAnalyst]

I think you misunderstand. If you look at the 4-week averages or cumulative average, these are both down for the year, -0.3% and -2.6% respectively.

It's never been clear to me what period the cumulative daily average is based on. So I have gone back to underlying weekly data computed my on 52-week averages ending July 8, 2017 and July 9, 2016. These are 9,220 kb/d and 9,315 kb/d, respectively. So here we see that annual gasoline consumption is declining, -95 kb/d or -1.02% y/y. In that time frame, the average retail price of gasoline has risen from $2.30/gal to $2.40/gal, a 4.1% nominal increase, while inflation rose about 2%. Thus, we have a real price increase of 2.1% paired with a consumption decline of 1%. So either demand has become very price elastic or the US economy simply needs less gasoline. Either way it would be a decline in economic demand.

By contrast, in the preceding year consumption grew 3.1% while the price of retail gasoline fell 20% nominally. This looks like a simple price elasticity response: consumers bought more because it was cheaper. It is harder to tell if the economy really required a greater quantity because this is masked by price response.

I sure looks to me like US demand for gasoline is in decline. The only way to increase consumption is to cut prices (last year). But raising the price of gasoline 4% is met with a 1% reduction in consumption (this year). So the oil industry is going to have to decide if they want to accept low prices to sustain consumption or hold out for higher prices at a loss of consumption. This conundrum is the consequent of a decline in economic demand. Whether consumption rises or falls depends on how much supply hits the market. This is why I make the distinction between demand and consumption. It appears that US gasoline demand is in decline, and with retail at $2.40/gal, consumption is declining too.

Sorry - we'll have to agree to disagree until further data comes out.

Specifically, I think it is remarkable that the US Gasoline demand is holding up this year YTD period (and at record level for this week) given the large surge in 2016 due to the large 2015-to-2016 drop in avg oil prices.

Note that 1Q17 vs. 1Q16 comparison is skewed with the year-over-year surge in avg oil price for those two quarters (ie. tough comparison). This normalized in 2Q, so we are seeing a continuation of the usual rise in demand for US gasoline. I see no indication, and no logic, for US gasoline demand to slow down in 2017 given that the EV evolution is at very early stages and the economy is doing fine.

 

[renim]

stitching 2 graphs together

History of Fuel Economy: One Decade of Innovation, Two Decades of Inaction

Sustainable Worldwide Transportation - Sales-weighted unadjusted CAFE

from 1982 - 2004 near zero change in overall USA fuel economy
from 2005 - 2014 serious ramp from 25mpg to 31mpg sales weighted basis.
from 2015 - present, new plateau at 31mpg level.

median age of USA vehicle is about 11 years, not sure what age vehicle is to go to crusher, but probably around 20 years.

roughly average new vehicle in is at 31 mpg (average include pickup trucks and SUVs, and cars)
vs average old vehicle out at 24mpg (2017-20yr is 1997, so 1997 vehicles are 24mpg fleet)

that Trend is about 30% - 33% improvement in fuel economy, just by rotation to today's SUV/F150 Focused fleet

 

[jhm]

Thanks, @renim. Just to clarify so we're all on the same page, the charts are based on model year. So it reflects the fuel efficiency of new vehicles. Fuel consumption is, of course, based on a mix of all model years in proportion to use. So even if efficiency is plateauing in recent years, the efficiency of the entire fleet keeps going up as late model year cars fall out of use.

BTW, I've been in contact with a Saudi oil analyst on this issue. He's been looking at gasoline consumption and miles driven. He seemed a bit distressed that inspite of increasing vehicle miles traveled, consumption is down. If you divide consumption by miles, you get a top down estimate of fleet MPG. To his surprise fleet MPG is still going up in the US.

So if the fleet MPG goes up faster than VMT (miles), then fleet consumption goes down.

 

[neroden]

I am curious how much of the fleet MPG increase is due to hybrids (including Prius type non-plug-ins). This would indicate the limits of ICE technology. I know the highest-mpg pure-ICE car made in recent decades, a nice little econobox, got 40 mpg, and I think that's probably a hard limit before the manufacturers have to go hybrid. Once you're going hybrid, the obvious way to increase fuel economy is to spend more time in electric mode...

 

[winfield100]

I am curious how much of the fleet MPG increase is due to hybrids (including Prius type non-plug-ins). This would indicate the limits of ICE technology. I know the highest-mpg pure-ICE car made in recent decades, a nice little econobox, got 40 mpg, and I think that's probably a hard limit before the manufacturers have to go hybrid. Once you're going hybrid, the obvious way to increase fuel economy is to spend more time in electric mode...

As an embarrassed traitorous data point who really really wants a tesla sooner, my phev at 59,609 miles has 70.3 lifetime mpg. (And a salvage value of $14,000 cash if I sell right now). )
Mpg fleet will continue to creep up.
How big a continuous blip will 100% EV make? A lot.

 

[luvb2b]

yes i think it answered my question. i am still learning though, so i am trying hard to have insights like you do.

Did my previous message answer your question? I was expecting change in products supplied to reverse course, and that happened. I further speculated that total stock might prove to be a build. Indeed, that was wrong. It was a 3.9 mmb draw. Given that we are in peak demand season right now, a 3.9 mmb draw is good, but not spectacular.

 

[generalenthu]

Slightly off topic, but a really well written article.

The Energy Secretary Is Wrong: The Grid is Ready for Renewables