Shorting Oil, Hedging Tesla

[TheTalkingMule]

There are energy transition and climate change subforums/threads in the Energy, Environment forum. This is the TSLA Investors Discussion forum.

 

[mspohr]

There are energy transition and climate change subforums/threads in the Energy, Environment forum. This is the TSLA Investors Discussion forum.

So, you don't think a government emergency response to oil price will affect investors?

 

[TheTalkingMule]

And so it begins.

US commercial crude stockpiles up 2.5Mb this week, despite imports being down a full 1Mb/d.
Overall crude + products stockpiles up 1.5Mb....then another 5 or so Mb dumped on top.

US crude production is at 11.8Mb/d and the minute frackers return to the 13.5Mb/d rate from prepandemic....the bottom falls out.

Russian exports are in no danger of leaving the marketplace, they just may not land in Western Europe. Turkey, Eastern Europe, and all of Asia will simply get a fat discount from Russia.

Covid numbers are dwindling to nothing in the US and I'm sure the oil majors are clamoring to get new production moving in their newly bought Permian leases.

 

[mspohr]

Ban European flights and car use in cities to hurt Putin, report urges

Flights should be banned in continental Europe and car use banned in city centres to save energy and prevent Vladimir Putin profiting from fossil fuel sales, campaigners have said. It would be possible for Europe to quickly end its reliance on oil and gas from Russia by taking strong measures, according to a report by the climate adviser Mark Lynas, energy analyst Rauli Partanen, and energy and sustainability installations specialist Joris van Dorp.

Policies include rationing, with everyone in Europe allowed the same minimum amount of energy to use, and limiting thermostats to 18C in winter.
The authors argue that we need to go further, and say they have worked out how to eliminate 25% of all oil use in Europe. “We propose bans on all business flights, private jets and internal flights within Europe to save oil, and bans also on car use within cities,” they said. “This should be combined with free public transport. While the impacts of this are not easily quantified, we believe this could double the reduction in oil use beyond that proposed by the IEA.”

 

[TheTalkingMule]

You know the underlying reality is bad when even the IEA oil projections need to be pushed aside.

This whole thing is crumbling. If only there were a simple set of ETFs to short various WTI futures contracts. Why doesn't that exist?

Insight: Saudi Arabia leads OPEC decision to drop IEA data as US ties fray

A decision driven by Saudi Arabia that OPEC+ should stop using oil data from the West's energy watchdog reflected concern about U.S. influence on the figures, sources close to the matter said, adding to strain on ties between Riyadh and Washington.

www.reuters.com

 

[jhm]

US unnatural gas hits 14 year unnaturally high prices. No doubt the Russian (basic human decency) crisis is driving up demand for US gas exports. I guess the good new for the US is that this will drive up demand for solar, wind and battery storage. The price of wholesale power is largely set by the marginal gas producer. $8/mmBtu is about $64/MWh just in fuel cost for many gas generators. So as gas prices go up, power prices for RE and battery generation/discharge do as well.

The market if flashing big, bright neon signs to build out more solar, winds, and battery power. Sure, these light also excite oil and gas producers. But I think sanctions against Russia are a fairly long term issues. So new wells in the US are simply replacing wells in Russia that will be capped or go unreplaced. The boost in renewables lock-in a net reduction in global gas production.

 

[Dave EV]

$8/mmBtu is about $64/MWh just in fuel cost for many gas generators. So as gas prices go up, power prices for RE and battery generation/discharge do as well.

I'm not sure what the math here is, exactly, but I assume that $64/MWh is not the price of electricity going out of a plant? Meaning, it does not take into effect the efficiency of the turbine, whether that's ~30% for a single-stage gas turbine or ~50-60% for a combined-cycle gas turbine?

Edit: Here are some longer-term historical gas prices for additional context - funny enough from the EIA webpage with the headline: In 2020, U.S. natural gas prices were the lowest in decades

So $8/MMBtu is pretty high, we saw sustained prices around there from 2003-2008 when the economy crashed, with some seriously high spikes in between. IMO we have some room to go with regards to fossil fuel prices in the short to medium term.

 

[jhm]

I'm not sure what the math here is, exactly, but I assume that $64/MWh is not the price of electricity going out of a plant? Meaning, it does not take into effect the efficiency of the turbine, whether that's ~30% for a single-stage gas turbine or ~50-60% for a combined-cycle gas turbine?

Edit: Here are some longer-term historical gas prices for additional context - funny enough from the EIA webpage with the headline: In 2020, U.S. natural gas prices were the lowest in decades

So $8/MMBtu is pretty high, we saw sustained prices around there from 2003-2008 when the economy crashed, with some seriously high spikes in between. IMO we have some room to go with regards to fossil fuel prices in the short to medium term.

View attachment 795062

Please see Heat Rates reported by the EIA. For example, https://www.eia.gov/totalenergy/data/monthly/pdf/sec12_7.pdf or SAS Output. There are also break out by type of generator. The least efficient generator run will generally be the marginal generator. Gas turbines use about 11 mmBtu/MWh, so about $88/MWh just for fuel. You can see why this would only be used for peaking capacity, and this is relevant to the competitiveness of battery and solar-battery peaking generators.

 

[adiggs]

I'm not sure what the math here is, exactly, but I assume that $64/MWh is not the price of electricity going out of a plant? Meaning, it does not take into effect the efficiency of the turbine, whether that's ~30% for a single-stage gas turbine or ~50-60% for a combined-cycle gas turbine?

Edit: Here are some longer-term historical gas prices for additional context - funny enough from the EIA webpage with the headline: In 2020, U.S. natural gas prices were the lowest in decades

So $8/MMBtu is pretty high, we saw sustained prices around there from 2003-2008 when the economy crashed, with some seriously high spikes in between. IMO we have some room to go with regards to fossil fuel prices in the short to medium term.

View attachment 795062

You are correct - $64/MWh for fuel costs prices that plant out of the market against new build solar and wind, including solar and wind with co-located battery to smooth delivery.

Wind Power Purchase Agreement (PPA) Prices | Electricity Markets and Policy Group

emp.lbl.gov

Wind PPA prices are under $50/MWh in 2020. Power Purchase Agreements are typically a guaranteed price that power will be purchased for some period, often 15 years. Thus somebody building a wind farm / plant today will get financing based on a contract to sell the electricity generated for ~$40/MWh for 15 years. That is a profitable price to provide that electricity.

PV PPA Prices | Electricity Markets and Policy Group

emp.lbl.gov

Solar PPA prices are lower.

Some history on PPA prices, including battery adder.


Lots, lots more stuff like this. No links here from Rocky Mountain Institute - that's an organization I'd look to for more info. Also the state of Colorado I believe it was - they conducted an auction recently (2 years ago!?!) and got even lower prices for solar PPA (as well as solar plus battery).


End result - $64/MWh just for the fuel, ignoring any and all other costs to build and operate a natural gas fired power plant, prices that plant out of the market. Its so bad that there is a really good business case to build solar with battery on the part of the power plant owner - they get a lower cost of delivered power and the rest of us get a decrease in fossil fuel demand.

The only reason these are still in the market is that we're not building solar panels and getting them installed fast enough. That and regulatory capture / friction.

 

[jhm]

World has installed 1TW of solar capacity

The world has installed its first terawatt of hardware on Earth to generate electricity directly from the sun.

www.pv-magazine.com

Total PV solar installed has reached the TW scale. Also in terms of power generated, PV solar reach the 1PWh = 1000 TWh mark last year.

World will need 5.2TW of solar this decade to avoid climate breakdown

The International Renewable Energy Agency's latest global outlook has spelled out just how 'woefully' far the world is from capping temperature rises at 1.5C, and lamented: 'The stimulus and recovery efforts associated with the pandemic have also proved a missed opportunity.'

www.pv-magazine.com

According to IRENA, solar needs to reach 5.2TW installed capacity by 2030. This means that growth needs to continue at an annualized rate of 20% or better. This seems doable, and it also means exiting the decade at a 1TW annual run rate for new installations. The current run rate is about 210 GW/year.

Another feature of this continued growth in solar is that batteries need to be paired with solar. I anticipate that about 4 hours of battery will need to be paired on average as we approach 2030. So exiting the decade, we'll need about 4TWh of batteries just to pair with 1TW of solar. This of course is incremental to the roughly 10TWh we'll need for 100M EVs in 2030.

Certainly, it would be better of PV installations could reach 1TW/year sooner. Growing at 25%/y rather than 20%/y would hit this market in 2028 rather than 2030. At this faster pace, batteries might not be able to pair 4TWh to 1TW PV in 2028. This might not be so bad if most EV charging were to happen midday.

This is going to be an amazing decade.

 

[Doggydogworld]

You are correct - $64/MWh for fuel costs prices that plant out of the market against new build solar and wind, including solar and wind with co-located battery to smooth delivery.

Your article indicates solar+battery costs $20 for every MWh directly from the panels and $100 for every MWh routed through the batteries. So solar is only cheaper in the daytime, but we already knew that. FWIW the cheapest solar PPA I've seen is $15/MWh, for an El Paso Electric deal.

CA curtailed >200,000 MWh of solar/wind in the last week. Not a typo. Mostly due to location transmission congestion, it seems. Onsite batteries could help with that, but this is a pretty seasonal problem and batteries are even more expensive if only used a few months a year. It makes a lot more sense IMHO to simply have millions of EVs soaking up that excess midday solar.

 

[TheTalkingMule]

Your article indicates solar+battery costs $20 for every MWh directly from the panels and $100 for every MWh routed through the batteries.

Batteries aren't just for storage. They eliminate TONS of frequency maintenance and other ancillary costs.

Renewables + battery storage is cheapest when you look at the whole picture.

 

[engine ear]

A well optimized system will have a moderate amount of curtailment. California’s grid today has very little curtailment, far less than what a well optimized system should have. Far better to have too much capacity than too little. It is not at all realistic to expect a resource to have 100% utilization and definitely not optimal for overall system cost to attempt to avoid all curtailment. Many poorly designed cost analysis of 100% renewable energy are based on the assumption that the system must have 0% curtailment. Such as this one:

The $2.5 trillion reason we can’t rely on batteries to clean up the grid

Fluctuating solar and wind power require lots of energy storage, and lithium-ion batteries seem like the obvious choice—but they are far too expensive to play a major role.

www.technologyreview.com

This project for Los Angeles appears to have the lowest cost solar + storage in the US. The storage component added roughy $52/MWh by my math for the portion of power that got stored.

Los Angeles says “Yes” to the cheapest solar plus storage in the USA

Los Angeles' municipal utility has voted 5-0 to approve a 25-year contract with a 400 MWac solar plus 300 MW / 1.2 GWh energy storage facility, with the aggregate price of the electricity from the project at 3.962¢/kWh.

pv-magazine-usa.com

Solar+storage is already cheap enough in some locations, they just need to sign more contracts. A lot more. Not sure what they are waiting for.

 

[Dave EV]

Batteries aren't just for storage. They eliminate TONS of frequency maintenance and other ancillary costs.

Renewables + battery storage is cheapest when you look at the whole picture.

A couple articles I ran across today related to the CAISO and battery discussion and some notes:

• Around 3 GW of utility scale batteries attached to the CAISO grid now.
• Up to 6 GWH of energy is being load shifted daily due to batteries
• CAISO is already seeing 5-min interval data where there is 3 GW of energy dispatched to the grid (essentially all batteries attached to the grid)
• PG&E alone is expected to bring 3.3 GW in total of batteries online by 2024.
• The ITC solar tax credit is limiting how CAISO can use batteries, because of the restriction that they be charged a minimum amount by solar energy.
• The 182.5 MW / 730 MWh Tesla Megapack project at Moss Landing just came online

Battery storage load shifting up to 6GWh a day on CAISO grid; operator eyes SoC-linked prices

Battery storage is load shifting up to 6GWh of energy a day on the CAISO grid, its storage sector manager told Energy-storage.news.

www.energy-storage.news

PG&E commissions 182.5MW/730MWh Tesla BESS at Moss Landing

PG&E has commissioned the 182.5MW/730MWh battery energy storage system supplied by Tesla at its Moss Landing substation.

www.energy-storage.news

 

[TheTalkingMule]

Back to oil. A fascinating 2 weeks in the "supply emergency" and more indications this whole trade is crumbling.

I didn't provide an update on last week's US commercial crude supply report because I was super drunk. Apologies. And it was a doozy of a report. Something like +10M barrels of total supply on only a 4Mb release from the strategic reserve. That's about as oversupplied as you can get in one week.

Then today's report comes out and US commercial crude stockpiles are down a whopping 8Mb. on the surface it looks like a full reversal of last week. Perhaps refineries were moving slow or there was maintenance at a few major depots. But nope.

This week's drop in supply was all about net imports, which were down a staggering 1.9Mb/d or ~13Mb. That more than explains the 8Mb drop in US crude supplies and continues the clear indication we're ready to plummet. The US was a net exporter of crude oil and refined products to the tune of 2.9Mb/d or 20Mb for the week. I'm pretty sure that's a record.

And US crude production remains 1.7Mb/d below levels just before the pandemic hit.

Strategic reserve stands at 556Mb, down 4.7Mb from last week. So the Biden threat of releasing 1Mb/d has only been about 2/3rds implemented.

Combine all that with Bank of America today calling "peak inflation" and I think you have all the ingredients in place to unwind this market. My Memorial Day WTI price target is now $70-80 and we'll dip below $60 by the 4th of July.

 

[adiggs]

Back to oil. A fascinating 2 weeks in the "supply emergency" and more indications this whole trade is crumbling.

I didn't provide an update on last week's US commercial crude supply report because I was super drunk. Apologies. And it was a doozy of a report. Something like +10M barrels of total supply on only a 4Mb release from the strategic reserve. That's about as oversupplied as you can get in one week.

Then today's report comes out and US commercial crude stockpiles are down a whopping 8Mb. on the surface it looks like a full reversal of last week. Perhaps refineries were moving slow or there was maintenance at a few major depots. But nope.

This week's drop in supply was all about net imports, which were down a staggering 1.9Mb/d or ~13Mb. That more than explains the 8Mb drop in US crude supplies and continues the clear indication we're ready to plummet. The US was a net exporter of crude oil and refined products to the tune of 2.9Mb/d or 20Mb for the week. I'm pretty sure that's a record.

And US crude production remains 1.7Mb/d below levels just before the pandemic hit.

Strategic reserve stands at 556Mb, down 4.7Mb from last week. So the Biden threat of releasing 1Mb/d has only been about 2/3rds implemented.

Combine all that with Bank of America today calling "peak inflation" and I think you have all the ingredients in place to unwind this market. My Memorial Day WTI price target is now $70-80 and we'll dip below $60 by the 4th of July.

Good god - Chevron is trading at $172 - it's not an ATH, but you get to go back to 1980 for the ATH.

not-advice. I need me some Chevron Jan 2024 100 strike puts at $4... and I have them. Probably could have gotten them for 3.60 if I'd been willing to wait it out a bit, but I like to take the midpoint on these really distant strikes and that filled immediately.


Owning company shares is almost certainly not the best way to take a position on the price of oil but its the one that I know best. And I've got most of 2 years to be more right than wrong about direction of the share price. There are probably better companies than Chevron to make the bet on, but to the degree that I know any of them I know this one.

Position sizing is big enough to keep my attention and have a chance of making a small difference in the portfolio, while small enough that I generated enough from put sales for this week to pay for a 100% loss. I'll be holding these for a pretty high % win - this is more of a Death to Oil trade, and I'd like to be on the ride in a direct financial way I also realize that oil won't die in any meaningful unit sense over the next 2 years. I'm going for something like the coal mining companies, where units dropped maybe 1/4th while company / industry value dropped more like 99%.

really, really not-advice

 

[TheTalkingMule]

I don't know enough to execute a plan in this sector, but I think I know two things.

1) Chevron will thrive longer than the vast majority of the industry. As the smaller private players die off, big boys like Chevron can scoop up their assets for nothing.

I certainly mean to buy CVX puts, but I think it's important to get in and out quickly for now. Like weeks/months each time. Kinda like the opposite of my TSLA strategy of the last few years.

2) CVX and all the rest will probably throw off some good dividends in this environment. So gotta keep that lag in mind. This is not the death of oil, pricing just got out of control and boosted valuations.

The end will come, it's just not gonna happen withing the Jan 2024 window for puts available today. I think we'll be able to buy "death puts" soon enough. Maybe take CVX from $80 down to $20 in 2024/25/26. It should be fairly obvious. We'll see.

 

[jhm]

Rystad: Oil Demand To Sink By 1.4 Million Bpd | OilPrice.com

Global oil demand will drop by 1.4 million barrels per day, according to the latest forecast by Rystad Energy on Friday cited by the National

oilprice.com

1.4 mbpd is a pretty big downer. Oil is a big drag on the whole economy. The price has been too high, high enough to create general demand destruction.

Looks like 2019 could hold as the demand peak at 100.21 mbpd.

 

[jhm]

McKinsey: Oil Demand Peak Could Be Two To Five Years Away | OilPrice.com

Slower demand for road transport could see oil demand peaking in the next two to five years, McKinsey & Company said in its new Global Energy Perspective 2022 report

oilprice.com

So McKinsey study (before Russia's invasion of Ukraine) finds that oil demand is waning due to EV adoption and will lead to a demand peak within a few years. Yep, what I've been saying for 5 years about a peak by 2025.

But in light of the war in Ukraine, I am revising my expectations. Oil demand has peaked at 100.21 mbpd in 2019, and I believe this peak will hold as the all time peak.

Consider that crude production peaked a year earlier in 2018. This was well before Covid-19 was an issue. Even before the war in Ukraine, the oil supply was so high that Brent has trembling above $80/b, high enough to degrade demand growth. And producers were not moving to ramp up production. Now the world will struggle to apply sanctions on Russian oil. This will keep the supply low and price high. Moreover, the political nature of sanction creates policy uncertainty for oil producers. They don't know how much Russian will be allowed to compete in the global market. This uncertainty can discourage aggressive investment in oil. Brent could remain above $100/b for several years.

Essentially, oil demand cannot reach a new peak until production reaches a new peak and oil prices fall below a certain price, maybe $60/b. Meanwhile, EV production is ramping at max speed. 2021 saw the sell of 6.6M EVs. At a mere 45% annual growth this surpasses 20M EVs in 2024. I believe EV growth will be strong enough that there very little chance of a new demand peak being set in 2025 or later.

So the question gets narrowed, can oil demand set a new peak in 2022, 2023 or 2024? Before the war, 2022 had a far shot at surpassing 100.21 mbpd, but it is now highly unlikely. 2024 will also be a hard year for a new peak because over 20M EV will hit the road. Any residual problems with supply and high oil prices will diminish the odds. So I think 2023 is Tha goldilocks year that has the best chance of setting a new peak. But this means that oil producers need to hussle this year to drive down oil prices next year. I'm not seeing this hassle, but the Russian oil sanctions are a lot to overcome.

The best way oil could reach a new peak in 2023 or 2024 comes down to one man. Putin would need to stop this foolishness and exit Ukraine on such good terms with the whole world that all nations are willing to drop all sanctions on Russian oil before 2023. Sadly, Putin is not morally or politically capable of making nice with Ukraine and the west. So I'm not worried that an outbreak of peace and harmony will threaten the world with a new peak of oil production and consumption.

So my friends, I belive that oil has likely peaked in 2019. I'd be interest in what other people think the chances are. For now my subjective probability for the peak year are as follows:

2019 50%
2022 7%
2023 20%
2024 15%
2025 7%
Later 1%

 

[TheTalkingMule]

Those odds look about right. I was thinking more like:

40%
1%
25%
25%
8%
1%
Same years.

Don't tell anyone tho, externally I'm quoting 2019 peak demand as 50/50.

Ironically, I think the stimulative nature of the energy transition ramping may get us a fresh peak in 2024.

Nice to see the countdown in it's final phase tho!