Shorting Oil, Hedging Tesla

[AwlBidnz]

This week The Economist published a couple of articles about the oil industry. First here's one about Aramco expanding its business in Asia:

Saudi Aramco looks downstream, and East
The oil giant’s shift towards Asia and beyond crude should worry its Western rivals

[...] Aramco’s chief executive, Amin Nasser, appears to have just one word for Asia: plastics. He notes that the typical Indian uses scarcely 10kg of the stuff a year, one-tenth as much as a Canadian, and wants to pour $100bn into chemicals over the next decade, on top of the SABIC splurge.

[...] The collapse in oil prices in 2014-16 reminded the industry that refining and chemicals are a useful hedge against volatility. As the warming world burns fewer hydrocarbons, Aramco is keen to secure captive markets for its crude feedstock.​

TSLA investors looking to bet against Big Oil should keep this in mind. Oil isn't just for transportation, so watch out for overestimating the effects of decarbonizing transportation. Also, the impact may vary from company to company.

The second anticipates more M&A deals in fracking.

Chevron buys Anadarko for its shale assets
The $33bn megadeal signals consolidation in the fracking business

Frackers suffered after 2014, when Saudi Arabia declined to cut production and oil prices plunged. Today, even with higher oil prices, they look constrained. Their median return on equity last year was less than half that of the s&p 500 stockmarket index, according to Morgan Stanley, a bank. More investors are demanding that they spend only as much as they earn—a novel concept.

[...]

The majors appreciate shale’s quick drilling times, predictable cashflows and favourable regulation. “It becomes your throttle,” says Bob Brackett of Bernstein, a research firm. “When times are good, you dial it up.” The question, then, is not whether Big Oil will bet on shale, but whether it will double down.

The Delaware basin certainly looks ripe for consolidation (see map). Last year the largest seven producers accounted for about half of output. Others each produced 4% or less. Wall Street may have cooled on the Permian. Big Oil certainly has not.


​

From where I sit, it seems big oil has been sampling the "koolaid" that the larger indy's have been serving and are hoping to prove that horizontal drilling has become a mining operation & they can do it better. Give them a bit of time and a boatload of money & they too will realize the economics of horizontal development are not sustainable. Then they will exit the States AGAIN and that's when our domestic prices will be setup for a repeat of diminishing supply and increasing prices.

 

[AwlBidnz]

These guys say it much better than I obviously have...

Opinion | A Market-Driven Green New Deal? We’d Be Unstoppable

 

[mspohr]

Is that measured in unit quantities or tonnage? Disposable plastic products also tend to be very lightweight.

Tonnage.
Facts . About Plastic . Help - Plastic Oceans Foundation
10 Facts About Plastic Pollution You Absolutely Need to Know
22 Facts About Plastic Pollution (And 10 Things We Can Do About It)
Fact Sheet: Single Use Plastics | Earth Day Network
Couldn't find any industry numbers; just greenwash articles on the benefits of plastic and their solution is to recycle.

 

[Paracelsus]

Interesting 4 minute discussion of modern Kentucky coal mining efforts:

 

[Oil4AsphaultOnly]

Interesting 4 minute discussion of modern Kentucky coal mining efforts:

That's very eye-opening. Especially about a minute in, where they said that even under Obama, the coal-mining continued. And how the clean air/water acts we're useless, because of a lack of enforcement.

Well no *sugar*! That's a reflection of the local government! Politicians in California aren't going to be able to do anything about enforcement in Kentucky! If this is what drives middle America into thinking that both sides of the aisle are the same, then they haven't been participating enough in their own governance.

America is diverse. I see why something along the coasts won't work for the inland states, but [to answer lolachampcar's question] governance has to be fixed at the local level first, before complaining about the national issues. Elect people who will champion the interests of humans above all else. Overturn Citizen's United!

 

[mspohr]

Tonnage.
Facts . About Plastic . Help - Plastic Oceans Foundation
10 Facts About Plastic Pollution You Absolutely Need to Know
22 Facts About Plastic Pollution (And 10 Things We Can Do About It)
Fact Sheet: Single Use Plastics | Earth Day Network
Couldn't find any industry numbers; just greenwash articles on the benefits of plastic and their solution is to recycle.

Interesting article. China stopped importing plastic waste and is now recycling more.

A Plastic Recycling Revolution Is Brewing ... in China

 

[RobStark]

 

[AwlBidnz]

Several would say that graph looks like there is a lot of potential in all those short stacks for future growth of oil “profits”.

 

[TheTalkingMule]

That UK figure is surprising to me. In a post-Brexit world, I assume they'll very rapidly electrify transport and be 100% offshore wind+storage. Dear lord the savings for the populace......incalculable. Not to mention the much quieter and soot-free urban areas.

You're on an island.
You have infinite zero-margin supply of the cheapest energy source in the world.
Get moving.

 

[TheTalkingMule]

These guys are blaming weak revenue on a "tough environment right now". How exactly do they expect things to improve? XOM lost $3M a day refining.

Exxon Mobil, Chevron dogged by refining, chemicals troubles - Reuters

I would think WTI hanging around $55-65 is actually as good as it's going to get when there's an obvious US(and likely global) glut.

Anyone think this whole thing is going to crumble soon? ANY significant global recession will crush the US fracking sector and potentially pull peak demand into something like 2022/23 rather than 2024/35. After all, nothing is performing right now other than the US......and we're simply running on tax cuts and fracking. How long can that last?

 

[jhm]

Bloomberg - Are you a robot?

This is an interesting development. New LNG contract indexes to coal rather than oil. I think this makes perfect sense.

First, oil is irrelevant to power generation, but coal and nat gas plants compete hour by hour. Fuel switching between coal and gas is not capital efficient. It makes more sense to lock in a gas contract where you know the price of gas will always be competitive relative to the price of coal. There's little reason to hold onto an oversized fleet when that happens.

Second, associated gas is a huge portion of the gas supply. The supply of associated gas can surge when the price of oil is high. But LNG contracts indexed to oil may make gas more expensive at times when a lower price is needed to clear a surplus of associated gas. There is even potential for negative price correlations. So I think oil is a pretty lousy index for LNG.

Then there is this. The LNG spot market for Japan and Korea have the price of LNG falling below coal on a per unit of energy basis. How much would LNG producers want to see this persist? Indexing contracts to coal can give LNG producers price stability for their capital intensive product.

So I would expect this trends to coal indexation to persist. Gas needs to compete head to head with coal so as to continue to take market share from coal. Coal indexation makes a lot more sense than oil indexation for both producers and consumers (utilities).

This also simplifies things for renewables. Currently renewable power competes with both coal and gas, which ever is cheapest at the time. So fuel switching supports having more generation capacity available to use whichever is cheapest. This is a tough market condition for renewables to compete within. If the price of coal and gas were more clearly linked. You'd see more coal capacity shuttered and fuel switching would not keep prices so low. Renewables not only avoid environmental ills, but they can act as a price check to coal and gas. Indeed, this may be part of what is driving LNG to index to coal. Gas can only really compete with coal long term.

 

[AwlBidnz]

Bloomberg - Are you a robot?

This is an interesting development. New LNG contract indexes to coal rather than oil. I think this makes perfect sense.

First, oil is irrelevant to power generation, but coal and nat gas plants compete hour by hour. Fuel switching between coal and gas is not capital efficient. It makes more sense to lock in a gas contract where you know the price of gas will always be competitive relative to the price of coal. There's little reason to hold onto an oversized fleet when that happens.

Second, associated gas is a huge portion of the gas supply. The supply of associated gas can surge when the price of oil is high. But LNG contracts indexed to oil may make gas more expensive at times when a lower price is needed to clear a surplus of associated gas. There is even potential for negative price correlations. So I think oil is a pretty lousy index for LNG.

Then there is this. The LNG spot market for Japan and Korea have the price of LNG falling below coal on a per unit of energy basis. How much would LNG producers want to see this persist? Indexing contracts to coal can give LNG producers price stability for their capital intensive product.

So I would expect this trends to coal indexation to persist. Gas needs to compete head to head with coal so as to continue to take market share from coal. Coal indexation makes a lot more sense than oil indexation for both producers and consumers (utilities).

This also simplifies things for renewables. Currently renewable power competes with both coal and gas, which ever is cheapest at the time. So fuel switching supports having more generation capacity available to use whichever is cheapest. This is a tough market condition for renewables to compete within. If the price of coal and gas were more clearly linked. You'd see more coal capacity shuttered and fuel switching would not keep prices so low. Renewables not only avoid environmental ills, but they can act as a price check to coal and gas. Indeed, this may be part of what is driving LNG to index to coal. Gas can only really compete with coal long term.

Believe it or not, I agree with you. Back in the "old days" natural gas competed with oil on a BTU basis. That hasn't been happening for years. A move to index LNG to coal is an obvious answer. Their uses overlap in many situations. Everyone was just too leery to make such a big perception change as it's not the "old guard" method of profit taking.

 

[AwlBidnz]

These guys are blaming weak revenue on a "tough environment right now". How exactly do they expect things to improve? XOM lost $3M a day refining.

Exxon Mobil, Chevron dogged by refining, chemicals troubles - Reuters

I would think WTI hanging around $55-65 is actually as good as it's going to get when there's an obvious US(and likely global) glut.

Anyone think this whole thing is going to crumble soon? ANY significant global recession will crush the US fracking sector and potentially pull peak demand into something like 2022/23 rather than 2024/35. After all, nothing is performing right now other than the US......and we're simply running on tax cuts and fracking. How long can that last?

YES, it is crumbling as we type. The economics for horizontal development, done as a "mining project", are not positive. This is requiring the oil companies to write down their reserve numbers because they can no longer justify drilling as many wells as they have on their books. The majors are late to the game. They think they can do it better. Maybe so, but, it will also take cheaper, as well as, better.

 

[neroden]

These guys are blaming weak revenue on a "tough environment right now". How exactly do they expect things to improve? XOM lost $3M a day refining.

Exxon Mobil, Chevron dogged by refining, chemicals troubles - Reuters

Yeesh. Chemicals is the *stable* part of the business. And refining -- gasoline and diesel prices are UP, but crude is up less, so how the hell are they losing money refining?

They're dead, dead, dead.

I would think WTI hanging around $55-65 is actually as good as it's going to get when there's an obvious US(and likely global) glut.

Anyone think this whole thing is going to crumble soon?

Yes.

ANY significant global recession will crush the US fracking sector and potentially pull peak demand into something like 2022/23 rather than 2024/35. After all, nothing is performing right now other than the US......and we're simply running on tax cuts and fracking. How long can that last?

I still don't think there will be a significant global recession any time soon, because of the solar/wind/battery/EV boom. Doesn't matter for the oil & gas business, though...


Exxon and Chevron's reaction to failure in ALL of their major business sectors: blow money on fracking in the Permian.

I stand my my prediction of XOM bankruptcy by 2030.

 

[jhm]

Yeesh. Chemicals is the *stable* part of the business. And refining -- gasoline and diesel prices are UP, but crude is up less, so how the hell are they losing money refining?

Through most of the quarter the price of gasoline was substantially below that of diesel. There was almost no spread on gasoline, so the bulk of refining profits were on diesel and lesser volume products. Recently, the price of gasoline has recovered in part.

I was meaning to post on this earlier. It is an illustration of what happens when demand for gasoline falls out of balance with other products. In the short run, the refiners will just weather it out. But a more persistent imbalance could force refiners to shift production. So what this illustrates is how vulnerable refiner profits are to the mix of demand. IMO2020 will create this kind of product dislocation and eventually EVs will too.

 

[jhm]

These are weekly spot prices from EIA. Note how typically the diesel and gasoline prices are pretty close to each other, but over the last year or so the spread has widened.

 

[adiggs]

19 Historical Oil Disruptions, And How No.20 Will Shock Markets | OilPrice.com

Here's somebody predicting a short term spike into the ~$120 range for oil, due to a combination of the Iran sanctions, Venezuela sanctions, and Libya production troubles.

Personally, I'm in the free markets camp on oil prices - if the market is ready for them to run high, let 'em go. That'll bring buyers of renewable energy out of the woodwork like crazy. If the market is ready to drive them into the ground, let 'em go - that'll drive the investors in O&G into the woodwork as investors are losing money.

(And mostly because I don't see a way for a worldwide engineered glide path to "success" - so let 'em have at it, the more messy the sooner, the better ).

 

[neroden]

Through most of the quarter the price of gasoline was substantially below that of diesel. There was almost no spread on gasoline, so the bulk of refining profits were on diesel and lesser volume products. Recently, the price of gasoline has recovered in part.

I was meaning to post on this earlier. It is an illustration of what happens when demand for gasoline falls out of balance with other products. In the short run, the refiners will just weather it out. But a more persistent imbalance could force refiners to shift production. So what this illustrates is how vulnerable refiner profits are to the mix of demand. IMO2020 will create this kind of product dislocation and eventually EVs will too.

Right, of course. Thank you. I actually wrote about this several years ago but I'd forgotten -- if refiners are optimized to the wrong mix, they hurt hard until they can retool, which is also very expensive.

I didn't realize we'd already gotten to the stage where the refiners were being hit because they can't change their production mix fast enough. I think I was expecting that to come later. But here we are.

They should be retooling to maximize jet fuel. I bet very few are.

 

[jhm]

Right, of course. Thank you. I actually wrote about this several years ago but I'd forgotten -- if refiners are optimized to the wrong mix, they hurt hard until they can retool, which is also very expensive.

I didn't realize we'd already gotten to the stage where the refiners were being hit because they can't change their production mix fast enough. I think I was expecting that to come later. But here we are.

They should be retooling to maximize jet fuel. I bet very few are.

Model 3 effect?

 

[TheTalkingMule]

US commercial crude inventories back up another 10M barrels last week to 471M. All real indicators have had us in a glut for the duration, but the market is acting like there have been huge swings in the ability to meet demand.

The Permian can be expanded as much as we like and demand is not growing at the pace expected. When will this finally hit the spot price of Brent?