Shorting Oil, Hedging Tesla

[jhm]

1m bpd/year is the underlying trend. EV sales last year were enough to convert ~160k bpd of that demand growth from oil to electricity. So without COVID & War oil demand would have grown 840k bpd instead of 1m.

I'm with Dog on the 1 mbpd threshold. This was thr number we were using nominally at the beginning of the thread years ago. At the time, consumption had been growing around 1.6mbpd per year, but as we looked out to the mid-2020s, there were other non-EV reasons why oil demand growth would soften. For a clear example, power generation from oil has been declining a couple percent per year since about 2015. No doubt, solar and batteries have enabled remote and small grid areas like the Hawaiian Islands to replace diesel generation. Additionally, fuel efficiency standards do soften demand growth from new cars. So a 1.6 mbpd threshold for EVs to tip the balance from demand growth to demand decline is way too high at this point. Is 1mbpd still too high? Maybe, but it's okay to be a little conservative.

I would point out one basic consideration. The threshold that EVs must overcome to halt demand growth ought to depend on the assumptions one is making about EV displacement. If you think you need 40M EV to displace 1 mbpd because new ICE vehicles are substantially more fuel efficient, then you should accept a lower hurdle for EVs than if you assumed 30M EV displacement. At one end of thr spectrum, one could argue that new EVs are replacing the oldest vehicles falling into disuse and that new ICE are also replacing these dirtiest vehicles while adding to the total fleet of ICE. Naturally, some would react that this skewing the analysis to favor EVs. Fair enough, establishment analysts generally skew it to the opposite extreme where they give maximal credit to new ICE for replacing dirty old ICE, leaving EVs to only get credit for displacing only the new ICE vehicles. So fine, analysts can skew their displacement metrics one way or the other, but if the results are to have any objective reality, the analyst should factor that into the threshold. If you want to give ICE maximal credit for efficiency gains, then you need to subtract those efficiency gains from your EV hurdle.

The objective demand peak does not depend on the clever assumptions of analyst. The real demand peak depends on the collective impact on ICE fuel efficiency and how few new ICE are hitting the road. In recent years, new ICE sales have declined faster than EVs have entered the market. If this persists, it can also hasten the demand peak.

Perhaps the better question is, how many new ICE (and hybrid) vehicles must be sold each year to sustain demand for motor fuels? The more efficient new ICE becomes, the greater the number of annual ICE sales must be to sustain motor fuel demand.

 

[jhm]

Let's see if we can sketch out an estimate of how many ICE sales are require to sustain motor fuel demand. I'm going to use some super ballpark, made up numbers. This is to illustrate the calculation. If anyone can suggest better sourced numbers, please make that contribution.

The ICE fleet is about 2B. It sustainably grows about 3% per year with about 5% or 100M new cars sold annually. Thus, if sales of new ICE were to drop to 2% (= 5% - 3%), that would just barely replace old ICE and the ICE would not grow. (Curiously, this implies cars remain in service some 50 = 1 / 2% years. So 2% is probably too low.)

Next, let's do the replacement rate for motor fuel growth. While the ICE fleet is growing 3%/year with annual sales at 5% of fleet size, motor fuel demand is rising 1% to 2% each year. Let's assume conservatively 2%. This means new ICE sales need to be at 3% (= 5% - 2%) of the fleet size to maintain constant motor fuel demand from the ICE fleet. This also means that the ICE fleet needs to keep growing 1% per year, just maintain total fuel demand and overcome the efficiency gains of new vehicles over old, inefficient replaced vehicles.

So the hypothetical conclusion is this: Given an ICE fleet of 2B vehicles, annual ICE sales of 40M are required to sustain fleet size and 60M to sustain demand for motor fuel. In 2021, EVs were about 7M out of 77M total sales. This leaves new ICE at 70M. Another 10M reduction and motor fuel demand growth could be arrested. In the coming years, total vehicle sales could approach 80M to 90M, so EVs may need to supply 20M to 30M to keep ICE sales below 60M.

Certainly, we could tighten up the numbers, but the beauty of this analysis is that I don't need estimate oil displacement per EV, or the mbpd hurdle. The focus is rightly put upon ICE sales required to grow oil demand. EV merely function as an alternative to ICE to suppress annual sales. There are other factors potentially suppressing ICE sales: high price of fuel, mobility as a service, supply chain issues, OEM economics/transition strategy, obsolescence ("Tesla effect"), climate conscious consumer choices, etc. All these other factors are headwinds for ICE sales, and they can matter to the precise timing of peak oil demand.

 

[jhm]

So I dredged up some better data from IEA (global car sales 2005 to 2020), IOCA (Private Car Veh in Use 2005 to 2015), and BP (gasoline consumption 2009-2019). Piecing it together, here's what I get.

Historic
ICE fleet growth rate 3.8%
ICE new cars 8.9%
ICE replacement 5.1% (= 8.9% - 3.8%)
Gasoline growth rate 1.6%
ICE fleet growth to sustain fuel consumption 2.2% (= 3.8% - 1.6%)
ICE new cars sales to sustain fuel consumption 7.3% (= 8.9% - 1.6%)

Projected
Current estimate of ICE car fleet 1,165M
ICE sales required to sustain fleet 59M (5.1%)
ICE sales required to sustain fuel consumption 85M (7.3%)

Implication
With just 70M ICE cars sold in 2021, this is only enough to grow the ICE fleet 11M cars (1% growth) and insufficient to sustain growth in fuel consumption. Further erosion of demand for ICE cars by EVs will only accelerate the decline in motor fuel demand. Covid-19 disruptions make it hard to confirm that we are actually past the demand peak. There may be other lags between changes in the ICE fleet and changes in fuel consumption as older cars can be driven more in the short run. But this analysis does seem to indicate that we are post peak.

I'd also point out that in 2019, there were 87M cars sold but 80M ICE sales were required to sustain fuel consumption. This pinpoints 2019 as the peak year according to this analysis. Hmm.

 

[Oil4AsphaultOnly]

So I dredged up some better data from IEA (global car sales 2005 to 2020), IOCA (Private Car Veh in Use 2005 to 2015), and BP (gasoline consumption 2009-2019). Piecing it together, here's what I get.

Historic
ICE fleet growth rate 3.8%
ICE new cars 8.9%
ICE replacement 5.1% (= 8.9% - 3.8%)
Gasoline growth rate 1.6%
ICE fleet growth to sustain fuel consumption 2.2% (= 3.8% - 1.6%)
ICE new cars sales to sustain fuel consumption 7.3% (= 8.9% - 1.6%)

Projected
Current estimate of ICE car fleet 1,165M
ICE sales required to sustain fleet 59M (5.1%)
ICE sales required to sustain fuel consumption 85M (7.3%)

Implication
With just 70M ICE cars sold in 2021, this is only enough to grow the ICE fleet 11M cars (1% growth) and insufficient to sustain growth in fuel consumption. Further erosion of demand for ICE cars by EVs will only accelerate the decline in motor fuel demand. Covid-19 disruptions make it hard to confirm that we are actually past the demand peak. There may be other lags between changes in the ICE fleet and changes in fuel consumption as older cars can be driven more in the short run. But this analysis does seem to indicate that we are post peak.

I'd also point out that in 2019, there were 87M cars sold but 80M ICE sales were required to sustain fuel consumption. This pinpoints 2019 as the peak year according to this analysis. Hmm.

Wouldn't 2019 and 2020 be anomaly years, since the stay-at-home orders (globally) meant an artificially lower oil consumption, despite the total number of ICE vehicles being essentially unchanged?

Edit: I'm of the opinion that we need to throw away any data from 2019 and 2020 as tainted.

 

[jhm]

Wouldn't 2019 and 2020 be anomaly years, since the stay-at-home orders (globally) meant an artificially lower oil consumption, despite the total number of ICE vehicles being essentially unchanged?

Edit: I'm of the opinion that we need to throw away any data from 2019 and 2020 as tainted.

Covid-19 did not have a serious impact until 2020. Oil consumption did increase in 2019. So far it remains the peak year at 100.21 mbpd.

 

[jhm]

The funny thing about my conclusion above is that the hurdle that EVs must exceed to force the peak is actually negative. Even if there we 0 EVs sold in 2021, 77M ICE would still fall short of the 85M required to sustain demand for motor fuels. Arguably ordinary hybrids and other efficiency gains amongst ICE vehicles along with a declining auto market is enough to force a peak. I think this peak is very flat, so it may be reasonable to describe it as a plateau. Moreover, it is unlikely that the total auto market could sustainably decline from this point onward. As Dog pointed out with power demand in the US, the efficiencies of LED lighting may have supported declining power consumption for a number of years. But once such a technology is fully deployed, it can not produce enough incremental decline in demand to overcome other forces that drive growth in demand. So this is why hybrids alone cannot sustain a decline in fuel consumption. We see now now more clearly the role for EVs.

ICE fuel efficiency gains (inclusive of hybrids) may suffice to create a temporary peak in fuel consumption, But BEVs are necessary to sustain post peak declines and to permanently eradicate all demand for motor fuels for ground transportation. In the coming years, it will be increasingly clear that oil demand peaked in 2019 (knock on wood). But we will debate more about the pace of decline and the consistency of secular decline each year. The more BEVs are sold each year, the stronger the annual decline in fuel consumption will be. At 7M new EVs each year, this is still too weak of a demand displacement to be sure that oil consumption will definitely decline in the following year. Especially, in recovery from Covid-19, we could see some noisy spurts of demand growth. But when EV makers are cranking out say 60M BEVs in a year, we should have very strong confidence that oil demand will decline in the following year. So for the next few years we persist in a murky gray area where BEV sales are eroding fuel demand, but maybe not enough to overcome a long list of other mostly short-term factors.

In the extreme case, where zero ICE vehicles are sold, we can speculate on the rate of decline in fuel consumption. Specifically, the ICE fleet itself declines about 5.1%. Now if the vehicles that fall in to disuse were to have the same fuel efficiency as those that remain in use, we'd be justified in assuming that fuel consumption would also fall 5.1%. But it is abundantly obvious that older cars in the fleet have worse efficiency and that there are strong economic forces to movate heavier and continued use of the more fuel efficient vehicles more than the older, less efficient vehicles. The vehicles that fall into disuse are among the most inefficient of the fleet. My best estimate then is that fuel consumption will decline 7.3%, not 5.1%. The advent of BEV robotaxis could even accelerate the rate of disuse, so 7.3% is potentially too conservative.

The simplest model for fuel demand growth is the following:

ICEfuelDemandGrowth = ICEsales/ICEfleet - 7.3%

This model makes clear that ICE sales must be at 7.3% of the existing fleet to maintain current fuel consumption levels. And when, ICE sales drop to zero, fuels consumption can decline 7.3% per year.

Let's see how we can apply this to 2021. Sale of 70M ICEV was about 4.2% of the fleet. So we estimate demand decline at 3.1%. What base do we apply this to? 2021 fuel stats are not available to me yet, and 2020 and 2021 are suppressed by Covid-19 issues. So let's consider 2019: gasoline 24.4 mbpd and diesel 27.8 mbpd. I'm not sure how much of each to attribute to auto; moreover, the advancement of EV battery tech and efficies in ICE are also impacting non-automotive consumption of gasoline and diesel. So broadly speaking the 3.1% reduction fuel consumption is not limited to just private passenger cars. This is important if we are trying to understand total demand for crude. Advanced battery tech is eroding oil demand through many pathways, and our analysis can thought of as a proxy for this broad disruption. Thus, the base of application could be anywhere from 24mbpd to 52mbpd. This yeild an impact from -0.7 mbpd to -1.6 mbpd.

We'll want to see how the 2022 gasoline and diesel numbers turn out. Will we see a 0.7 to 1.6 mbpd reduction from 2021 to 2022. Hard to say, there's alot more at play. Especially, economic recovery could still overcome demand erosion at play in the auto sector. Nevertheless, the scale of this demand erosion is quite material to annual growth or decline in demand for crude.

I think the oil analysts know that ICE sales are insufficient, but I haven't seen any published articles on it. Perhaps this footdragging on raising oil production is because the industry knows they are post-peak. Of course, they'll keep silent on this as long as investors are satisfied with the Covid-19 and recovery narratives.

 

[mrmtb]

Is anyone here actually shorting oil?

 

[jhm]

Is anyone here actually shorting oil?

I am not. I suspect that the oil industry realizes that they're better off with higher margins even on declining volumes. So I think it unlikely that we'll see an oversupplied market anytime soon. The global economy needs the price of oil to come down to help avoid a global recession, but I think Brent will remain above 80% for a while.

 

[TheTalkingMule]

Is anyone here actually shorting oil?

Via what mechanism? As far as I can see there's only one rational way to short the price of Brent crude, directly buying and selling oil futures. That's a little clunky and expensive.

I've been saying for quite some time I wish they were ETFs for each expiration of oil futures. Like why can't I buy puts on a December 2023 WTI ETF? Wouldn't management of that ETF just mean buying and selling December 2023 WTI contracts to match the interest in the ETF?

 

[Doggydogworld]

Via what mechanism? As far as I can see there's only one rational way to short the price of Brent crude, directly buying and selling oil futures. That's a little clunky and expensive.

I've been saying for quite some time I wish they were ETFs for each expiration of oil futures. Like why can't I buy puts on a December 2023 WTI ETF? Wouldn't management of that ETF just mean buying and selling December 2023 WTI contracts to match the interest in the ETF?

Why do you need an ETF? Just buy puts on the WTI contracts themselves.

 

[TheTalkingMule]

Why do you need an ETF? Just buy puts on the WTI contracts themselves.

I don't wanna pay for theta, I just want an investment that pays me the difference between today's Dec2023 WTI futures price and the day I want to sell. Basically wanna sell barrels and then buy em back without having to sell barrels. And most importantly, I wanna do it in my IRA.

 

[adiggs]

Is anyone here actually shorting oil?

I have established a small position. My intent is shorting oil, though the mechanism is fairly indirect and arguably outright bad. I've purchased some Jan '24 100 strike puts on Chevron when CVX was in the low 170s.

NOT-ADVICE
Like really - I don't follow the company nearly as closely as I need to be doing, to do anything systematic / planned / smart with this

I know more about company investing than oil futures or other mechanisms for being in the oil market, and I figure an oil miner is a reasonable proxy for the price of oil. Thus my choice of an oil company instead of the price of oil.

A year or more back I read a quote by the CVX CEO saying that the one thing that wasn't on the table when the oil price was low, and company cash flow was bad (borrowing money to pay dividend), was the dividend. That the company's first priority was to defend the dividend. That sounded like madness to me and I've kept CVX in mind ever since

I don't even know if the current CEO and/or the current business plan for CVX has anything like this going on. And with a high price of oil cash flow is awfully good. AND with the industry focus on cash flow and profits over expansion of production, one of the key drivers of oil mining bankruptcy is much more distant.

Oh - and I'd have a better shorting mechanism if I'd chosen a company that is as close to a pure oil miner as possible. CVX also has a refining business which dilutes my purpose. A company with a significant natural gas business will also hurt the purpose, if the purpose is to short oil - there is nothing that says oil and nat gas need to move in tandem as they have different markets and market forces.


In sum - I've taken a small purchased put position. Long puts give me a defined loss and the position is small enough that its more of a toy to keep me interested in the larger topic. Also large enough that there is an outside chance of a noticeable profit, and is almost certainly a badly chosen instrument for my "Death to Oil" short. And probably using a company that is bad for the purpose.

The timing is also probably too soon by at least a year if not closer to 3 years.


One component of my 'investment' thesis that might actually be useful. I expect that we'll see something among the oil miners that is similar to what happened in the coal mining industry, at least in the US. Over a 10ish year stretch (2007 - 2017 give or take) the unit volume of coal being consumed in the US went down roughly 1/3rd (more accurately - coal reduced from ~33% to ~25% of US primary energy).

But the market value of the companies mining the coal went down by 99% (mostly via serial bankruptcy). I don't expect we'll see unit volumes of oil close to today's units and CVX going to $0 on a bankruptcy over these 2 years, but I do expect to see that sort of bankruptcy dynamic among publicly traded oil miners sooner or later.

 

[TheTalkingMule]

OPEC (Saudis) chopping oil prices for Asia deli very by $5. Knowing the Chinese. They'll wait for a $15 discount.

Another 3 weeks of US policy remaining the same, or God for I'd releasing the full 1Mb/d from the strategic reserve they planned, and OPEC/Wall Street/London traders will be done.

It's be a lot easier if Russia pulled out of Ukraine, but I think the bottom falls out regardless. Perhaps the Saudis know this fabricated crude spike is ending and want to get out in front before Brent slips to $60.

 

[Doggydogworld]

Today's oil price includes a risk premium. Will western politicians stop paying lip service and blockade Russian oil exports? I don't think so, but the market is pricing in a small chance. Or of Putin teaching the west a lesson after he's rebuilt reserves. Or of Ukraine taking out a bunch of pipelines. Or.... whatever.

As long as Russia exports continue (mostly) unabated the equilibrium price should be lower. But until the risk goes away, or consumption plummets, there is no reason for "the bottom to fall out".

 

[adiggs]

OPEC (Saudis) chopping oil prices for Asia deli very by $5. Knowing the Chinese. They'll wait for a $15 discount.

Another 3 weeks of US policy remaining the same, or God for I'd releasing the full 1Mb/d from the strategic reserve they planned, and OPEC/Wall Street/London traders will be done.

It's be a lot easier if Russia pulled out of Ukraine, but I think the bottom falls out regardless. Perhaps the Saudis know this fabricated crude spike is ending and want to get out in front before Brent slips to $60.

I would be pretty happy if you get this one right - no way CVX holds onto $170ish / share with Brent at $60 (or so I believe ).

 

[TheTalkingMule]

Iranian exports to China are shrinking and being displaced by cheap Russian oil. How long does this have to go on before the "tight market" trade cracks?

China's Iranian oil imports ease on poor margins, lure of Russian oil

China's Iranian oil imports in April came off peak volumes seen in late 2021 and early 2022 as demand from independent refiners weakened after COVID-19 lockdowns pummelled fuel margins and on growing imports of lower-priced Russian oil.

www.reuters.com

 

[jhm]

Brent down 5.9% to $105.8/b
Henry Hub down 12% to $7.08/mmBTU

China catches COVID
Global economy at risk of recession

 

[jhm]

EV-Volumes - The Electric Vehicle World Sales Database

EV-volumes is a database of sales statistics, charging infrastructure, batteries, car models, and sales forecasts for plug-in cars. EV-volumes also delivers market studies and reports

www.ev-volumes.com

I've got to correct my numbers. It think EV-volumes have updated their chart.

So EVs are 6.75M, 8.3% of total auto sales. This implies 81.3M total auto sales of which 74.6M are ICE (non-EV). These numbers are a little different that than the 6.6M EV and 70M ICE that I've been using above.

This revision of numbers does not materially change my assessment. 74.6M ICE is still substantially below the 82.8M required to sustain fuel consumption in 2021. So we are still post peak! In 2022, there are about 1,160M ICE in the fleet, and 84.5M new ICE are required to sustain consumption and 58.9 to sustain the number of vehicles in the ICE fleet.

So people are projecting that EV penetration with hit 24% in China this year. Additionally, COVID is threatening lower fuel consumption this year. So it is not shaping up to be a strong year for ICE sales in China. So my impression is that substantial headwinds may prevent global ICE sales from hitting the 84.5B level this year. Anyone care to venture a guess how many total autos and specifically EVs will be sold this year?

The oil industry is running out of ICE.

 

[Doggydogworld]

EV-Volumes - The Electric Vehicle World Sales Database

EV-volumes is a database of sales statistics, charging infrastructure, batteries, car models, and sales forecasts for plug-in cars. EV-volumes also delivers market studies and reports

www.ev-volumes.com

I've got to correct my numbers. It think EV-volumes have updated their chart.

View attachment 802250

So EVs are 6.75M, 8.3% of total auto sales. This implies 81.3M total auto sales of which 74.6M are ICE (non-EV). These numbers are a little different that than the 6.6M EV and 70M ICE that I've been using above.

This revision of numbers does not materially change my assessment. 74.6M ICE is still substantially below the 82.8M required to sustain fuel consumption in 2021. So we are still post peak! In 2022, there are about 1,160M ICE in the fleet, and 84.5M new ICE are required to sustain consumption and 58.9 to sustain the number of vehicles in the ICE fleet.

So people are projecting that EV penetration with hit 24% in China this year. Additionally, COVID is threatening lower fuel consumption this year. So it is not shaping up to be a strong year for ICE sales in China. So my impression is that substantial headwinds may prevent global ICE sales from hitting the 84.5B level this year. Anyone care to venture a guess how many total autos and specifically EVs will be sold this year?

The oil industry is running out of ICE.

I don't know why Jose changed from his detailed 6.495m breakdown in his CleanTechnica article to this 6.750m number. That drops Tesla to a bit under 14% share.

Anyway, the Chinese tail is now wagging the global EV sales dog. China was 56% of Q1 sales. EU 95g ramps way down the next couple years and the US EV market is still a rounding error. If China keeps their foot on the un-gas they could do 5.5m this year. I see Europe below 3m and US below 1m, so figure ~9.5m globally. I don't know about ICE, but I think VMT trends affect gasoline usage more than any given year's ICE sales. And flat gasoline does not mean flat oil consumption as long term trends remain in place for other uses like trucking and flight.

 

[jhm]

So it seems ICE will fo a third year with insufficient sales to sustain motor fuel consumption. This is not to say that there must be an immediate reduction in consumption, but simple recognition that over some time the fleet becomes to old and does not grow fast enough to sustain.

It is not a simple matter that families will just put more miles on their cars. As cars age, maintenance cost per mile goes up and feul economy can decline. That makes an aging fleet more costly to operate along with higher fuel prices. This is a real drag on demand for VMT. Additionally, fuel demand is sustained by growth into developing countries. Fewer new cars mean few used cars exported into lower income countries. Additionally, used cars have become very expensive, and many potential first time car buyers get priced out of the market. They will just continue to go without VMTs, walking, biking or taking a bus instead. We also need to consider that demand for new cars is in part driven by demand for VMT. The decline is new car sales is primarily driven by supply chain issues, but demand for car ownership may also be softening as well. Covid transformed employment mobility. Many workers continue to work from home, not because they must, but because they can. Commuting is a major productivity drain and costly, and many employers can save money reducing office space. So there is easily a chunk of demand for both commuter vehicles and commuter miles that are permanently lost.

So all these issues do suggest, at least in my thinking, that there are real linkages between insufficient ICE sales, slowed growth in VMT and ultimately declines in fuel consumption. Perhaps there is a little lag between ICEs and changes in fuel consumption, but over time either demand is eroded or somehow ICEs pick up and make up for delayed sales. But I do not believe the latter will happen. Each year that an ICE sale is delayed increases the chance that it will never be made. It can be replaced by an EV or lifestyle changes will forgo a marginal car. Moreover, as time passes, ramping up ICE production becomes a riskier investment for automakers that need to focus CapEx on becoming competitive as an EM maker. I believe BYD is shutting down ICE production to focus on EVs. This is what it will take for some to thrive through the transition. My belief is that low auto sales from 2020 to 2025 create pent up demand that will mostly be satisfied by EVs. The average age of the ICE fleet will become several years older, and this could hasten the conversion of the fleet from ICE to EV. Every ICE car that can be avoided (not produced) for the next few years is one less ICE to be replaced with an EV. I believe this pent up demand sets up for a more rapid transition and more rapid fall off in motor fuel consumption. So even if in the near term insufficient ICE sales does not force fuel decline immediately, it would otherwise set up a more dramatic decline in consumption latter.

We'll keep an eye on it. But so far I'm not seeing much potential for oil to make a comeback in the 2020s.