Shorting Oil, Hedging Tesla

[theschnell]

I’ve not come to TMC in many months, but the info JHM has pulled together in this thread is gold!!

In addition, someone on Twitter posted this article

Oil Nations, Prodded by Trump, Reach Deal to Slash Production (Published 2020)

claiming that there has been an artificial cap on oil supply that has just expired and therefore oil supply to the market may increase. It seems unlikely to me that a cap put in place in April of 2020 would still be in place, but if true, more supply may also bring prices down.

 

[jhm]

I’ve not come to TMC in many months, but the info JHM has pulled together in this thread is gold!!

In addition, someone on Twitter posted this article

Oil Nations, Prodded by Trump, Reach Deal to Slash Production (Published 2020)

claiming that there has been an artificial cap on oil supply that has just expired and therefore oil supply to the market may increase. It seems unlikely to me that a cap put in place in April of 2020 would still be in place, but if true, more supply may also bring prices down.

Thanks! I've been shocked by this latest realization that ICE sale are insufficient. For days I was puzzling over why I had missed it. I should have seen this 2 or 3 years ago, but my framing was wrong. My framing began with EV sales and fuel displacement. But the better way is to begin with ICE sales and the positive creation of demand for fuels. EVs are the shiny, new distraction away from the more immediate fault lines in oil demand creation. So I have to wrestle with what I means that my own thinking had been distracted for yeara from where the action is. To be fair, EVs do play an enormous and essential role in the secular decline of the oil industry. But EVs don't real determine the peak. And this is why the peak happened in 2019 and I am only just beginning to see it in hindsight.

Pay wall prevented me from reading the article. The oil industry is always colluding to limit supply. I'm not so sure why the present constraints are worth preserving. The industry is risking global demand destruction and an economic recession. Moreover, high prices at the pump are persuading most drivers to make their next car an EV. Such high prices are not really in the longer-term interest of the industry. So it's hard for me to fathom how a supply cap agreement could hold up for long.

And frankly I wish it would. Even if we head into a global recession for want of oil, this will create enormous pressure to make the switch to EVs and RE. We need to get the global economy off of oil dependency. Every country on earth should come to the conclusion that the best way to secure domestic energy for their economy is to massively pursue EVs and RE. Any country that is dependent on oil and or gas imports is economically screwed.

 

[jhm]

Well, look at this!

 

[jhm]

Record High Diesel Prices Will Ripple Across The Economy | OilPrice.com

A global supply shortage and tight domestic inventories has sent diesel prices to record highs, a factor that is sure to drive inflation even higher

oilprice.com

Diesel is selling at the largest premium to gasoline ever. This suggests that demand for gasoline is becoming weaker than for diesel. It is unfortunate for the economy the the imbalance drives up the diesel price since diesel has much stronger linkages to the economy than gasoline.

It would be really super if Tesla were cranking out Semis in large numbers now. The economics would be really compelling. It would help accelerate the transition to an EV based economy.

 

[adiggs]

Record High Diesel Prices Will Ripple Across The Economy | OilPrice.com

A global supply shortage and tight domestic inventories has sent diesel prices to record highs, a factor that is sure to drive inflation even higher

oilprice.com

Diesel is selling at the largest premium to gasoline ever. This suggests that demand for gasoline is becoming weaker than for diesel. It is unfortunate for the economy the the imbalance drives up the diesel price since diesel has much stronger linkages to the economy than gasoline.

It would be really super if Tesla were cranking out Semis in large numbers now. The economics would be really compelling. It would help accelerate the transition to an EV based economy.

Presumably the big diesel prices will bring along necessary capital investment at refineries to get a higher fraction of diesel out of barrels of oil, probably largely at the expense of gasoline. There will be a lag though as refiners will need to be satisfied that increasing the ability to get diesel out of oil will pay off economically.

I wonder if we're at the start of an industry shift of refined product in favor of diesel. As you've recently been observing gas demand is flat to down due to improving efficiencies in ICE cars, as well as EV sales.

These changes haven't really entered the diesel market yet (EV sourced demand destruction). Its also my guess that there aren't a lot of efficiency improvements available for the Class 8s - shipping company have been hyper sensitive to fuel prices for business reasons for forever (aero wheel covers, trailer skirts for example).

My guess is that the relatively insensitive-to-efficiency personal and small business level consumption of diesel (class 1/2/3 commercial vehicles in the US) is pretty small potatoes compared to Class 8 consumption. Regardless of size the personal vehicle end of the ladder has been historically optimizing for other stuff than fuel efficiency where Class 8 designs have seemingly been primarily driven by fuel efficiency for years (decades?).

 

[Dave EV]

It would be really super if Tesla were cranking out Semis in large numbers now. The economics would be really compelling. It would help accelerate the transition to an EV based economy.

The Semi and other electrified transport simply can't get here fast enough.

It's very clear that the oil companies see the decline in the oil and the burning of oil related products for transportation and they are all milking as much profit out of the market as possible while they can still blame rising prices on inflation.

It's too bad that the real cause is the fact that they have simply stopped investing and the blame goes elsewhere, but it's good that they are limiting investments into fossil fuels.

Now we just need batteries and long-range electrical distribution systems to improve the flexibility of the grid to help move renewable energy where it's needed most at any point time.

I still think that Tesla made a mistake in not adding V2G capabilities to their cars and I love the fact that the F150 Lightning is shipping with this feature.

My car spends most of it's time in the garage and I would love to be able to use them for grid arbitrage. Just let me charge 15 kWh at off-peak rates from the grid and discharge 15 kWh at peak rates daily - I could net around $4.50/day in the winter over $8/day in the summer months. Do this at at the bottom half of the SOC range of the battery and you probably would barely notice any additional wear and tear on the battery.

 

[Doggydogworld]

It is not a simple matter that families will just put more miles on their cars.

I respectfully disagree. The trends that drive VMT upward aren't affected by vehicle production supply chains.

As cars age, maintenance cost per mile goes up and fuel economy can decline.

Which means more oil consumption for a given VMT.

That makes an aging fleet more costly to operate along with higher fuel prices. This is a real drag on demand for VMT.

In general it's more economical to drive cars further. That's why taxi operators drive their cars 500k miles instead of junking them at 150-200k as happens with most personal cars.

Your thesis relies a lot on high oil prices, but those indicate high demand. If we are really past the demand peak prices will fall, negating the price-related parts of your thesis. That's why this thread is called "Shorting OIl, Hedging Tesla", lol.

Is it possible Covid, War and other disruptions will last five more years until the natural demand peak comes? Yes, it's possible. But it's too much of a long shot to be making final pronouncements.

 

[gavine]

I still think that Tesla made a mistake in not adding V2G capabilities to their cars and I love the fact that the F150 Lightning is shipping with this feature.

It's definitely a great marketing feature, however, I understand that you need several thousands of dollars of extra hardware to make it work. I thought it was enabled through the Ford wall connector EVSE, but it's not.

 

[ggies07]

It's definitely a great marketing feature, however, I understand that you need several thousands of dollars of extra hardware to make it work. I thought it was enabled through the Ford wall connector EVSE, but it's not.

Plus, you don't want people at the beginning of this transition to start yelping that their battery degradation is extremely high due to driving + backup. We need that million mile chemistry Jeff Dahn has been working on.

 

[TheTalkingMule]

Your thesis relies a lot on high oil prices, but those indicate high demand. If we are really past the demand peak prices will fall, negating the price-related parts of your thesis. That's why this thread is called "Shorting OIl, Hedging Tesla", lol.

Demand is super-low right now. WTI crossed $110 today.

 

[Dave EV]

It's definitely a great marketing feature, however, I understand that you need several thousands of dollars of extra hardware to make it work. I thought it was enabled through the Ford wall connector EVSE, but it's not.

Yes, but the costs I saw (I think it was $3-5k) are lot cheaper than a Powerwall and then you also get a much bigger battery that you can use.

Plus, you don't want people at the beginning of this transition to start yelping that their battery degradation is extremely high due to driving + backup. We need that million mile chemistry Jeff Dahn has been working on.

Done properly, there shouldn't be any significant additional capacity loss on the battery. I have to hope that Ford spent extra effort into these batteries to hold up to this kind of use. The loads on the battery (up to 10 kW) are negligible. Additional cycling should also be negligible in the grand scheme of things, if they picked a good chemistry. We shall see!

 

[mspohr]

Done properly, there shouldn't be any significant additional capacity loss on the battery. I have to hope that Ford spent extra effort into these batteries to hold up to this kind of use. The loads on the battery (up to 10 kW) are negligible. Additional cycling should also be negligible in the grand scheme of things, if they picked a good chemistry. We shall see!

Since Ford has no experience with batteries and EVs, I wouldn't trust them to know what they are doing. All batteries have a limited cycle count and powering your house will use cycles.
Also, Powerwall recharges from solar for a daily top up. Your truck doesn't.

 

[Dave EV]

Since Ford has no experience with batteries and EVs, I wouldn't trust them to know what they are doing. All batteries have a limited cycle count and powering your house will use cycles.
Also, Powerwall recharges from solar for a daily top up. Your truck doesn't.

Huh? Ford has a long history of electric vehicles, going all the way back to 1914.

More recently with Lithium Ion tech it's sold the Focus Electric (2011) and the PHEV Ford Fusion and C-Max (2012).

Of course, today the Mach-e is their first real mass-market EV, but it's too new to know how well it's batteries will hold up. But as we've seen even with Tesla, slight variations in battery chemistry can have large effects on durability. For example, the original 85 kWh Model S/X batteries have excellent aging characteristics, but the 90 kWh chemistry degrades fast enough that it soon holds less energy then a 85 kWh pack. wk057 has been running some long term tests on the cells from those packs and all the cells from the 90 kWh packs died, but the 85 kWh cells are still going.

Yes, batteries will eventually die if you cycle them enough, but the battery in an EV is so big that you are highly unlikely to do anything more than a small fraction of a cycle, and shallow cycles are very easy on a pack. Calendar life aging due to heat, time and SOC appears to be the primary aging component of most lithium batteries, though, not cycling.

 

[jhm]

IEA: Lower Demand Changes Everything For Oil Markets | OilPrice.com

In its latest report, the IEA no longer sees a deficit in crude markets, stating that slower demand growth will make the likelihood of an oil price shock much lower

oilprice.com

What a weird time for oil markets! Curring price is now $113/b. That's high to kill astroturf and everything else in the oil economy. The sanctions against Russia create certain dislocations around certain types of crude. So midstream will need to adjust to different mixes of crude. So just ramping up production of crude doesn't really resolve the dislocation problem. Prices are likely to remain high.

Then on top of all the supply problems demand is weak. This is one of those times when you can't point to a high price and conclude that demand is strong. The situation is much more nuanced than that. Indeed oil prices are so high that it is destroying consumption. For example, independent truckers in NA find that $6/gal for diesel puts them out of business. This also has consequences for consumers of goods that must be trucked. This classic demand destruction. The economy is at imminent risk of recession.

We need Tesla cranking our Semis now to save the truckin' economy. Even so, every EV sold is eroding oil demand and helping the global economy to gain some resilience to an oil-driven global recession.

 

[TheTalkingMule]

IEA: Lower Demand Changes Everything For Oil Markets | OilPrice.com

In its latest report, the IEA no longer sees a deficit in crude markets, stating that slower demand growth will make the likelihood of an oil price shock much lower

oilprice.com

What a weird time for oil markets! Curring price is now $113/b. That's high to kill astroturf and everything else in the oil economy. The sanctions against Russia create certain dislocations around certain types of crude. So midstream will need to adjust to different mixes of crude. So just ramping up production of crude doesn't really resolve the dislocation problem. Prices are likely to remain high.

Then on top of all the supply problems demand is weak. This is one of those times when you can't point to a high price and conclude that demand is strong. The situation is much more nuanced than that. Indeed oil prices are so high that it is destroying consumption. For example, independent truckers in NA find that $6/gal for diesel puts them out of business. This also has consequences for consumers of goods that must be trucked. This classic demand destruction. The economy is at imminent risk of recession.

We need Tesla cranking our Semis now to save the truckin' economy. Even so, every EV sold is eroding oil demand and helping the global economy to gain some resilience to an oil-driven global recession.

I like how they refer to slowing demand as Russia's output "driving down world oil supply by 710 kb/d to 98.1 mb/d". Never mind the 1Mb/d dip in Russian exports back in March as the war began has now almost entirely resumed.

There is essentially zero interruption in flows of Russian oil exports. And why would there be? In what scenario does this crude not get to market? They can always.....

Quadruple exports to individual European markets, or

Swap the crude into shady Greek tankers and sell it from there, or

Simply sell it to China

This idea of a global marketplace not finding a home for oil Russia wants to sell is foolish at best.

Edit to add: And just think of what the final crude demand figure will be for 2022 if the IEA number is 98Mb/d now. It'll likely end somewhere near 96Mb/d with no recession or lower if things get worse. I'd love to see how that equates to any possibility of recovery to a new ATH. This article moves likelihood of 2019 global peak demand much higher.

 

[Doggydogworld]

Then on top of all the supply problems demand is weak. This is one of those times when you can't point to a high price and conclude that demand is strong. The situation is much more nuanced than that. Indeed oil prices are so high that it is destroying consumption. For example, independent truckers in NA find that $6/gal for diesel puts them out of business. This also has consequences for consumers of goods that must be trucked. This classic demand destruction. The economy is at imminent risk of recession.

Oil prices doubled on a very small supply reduction. That's strong demand. And while truckers complain, in the end they drive and pass the costs on.

There is essentially zero interruption in flows of Russian oil exports. And why would there be? In what scenario does this crude not get to market? They can always.....

Quadruple exports to individual European markets, or

Swap the crude into shady Greek tankers and sell it from there, or

Simply sell it to China

This idea of a global marketplace not finding a home for oil Russia wants to sell is foolish at best.

Yep. I said on day one talk of embargo and "not funding Putin's war" was empty political posturing. You can't eliminate Russia's 5m bpd of non-Chinese exports unless you cut western consumption 5m bpd. And you can't do that without wartime rationing. A "free market" approach is counterproductive -- Putin just gets more $$ selling fewer barrels.

That being said, Russian exports have declined a bit. And the workarounds you mention all impose frictional costs, longer transit times, etc. So they disrupt the market beyond the actual decrease in supply.

Edit to add: And just think of what the final crude demand figure will be for 2022 if the IEA number is 98Mb/d now. It'll likely end somewhere near 96Mb/d with no recession or lower if things get worse. I'd love to see how that equates to any possibility of recovery to a new ATH. This article moves likelihood of 2019 global peak demand much higher.

Demand will equal supply. We can only reach 96m via widespread recession/lockdown or much higher prices. Or wartime rationing, but we all know that won't happen.

 

[mspohr]

Demand will equal supply.

?

 

[jhm]

I like how they refer to slowing demand as Russia's output "driving down world oil supply by 710 kb/d to 98.1 mb/d". Never mind the 1Mb/d dip in Russian exports back in March as the war began has now almost entirely resumed.

There is essentially zero interruption in flows of Russian oil exports. And why would there be? In what scenario does this crude not get to market? They can always.....

Quadruple exports to individual European markets, or

Swap the crude into shady Greek tankers and sell it from there, or

Simply sell it to China

This idea of a global marketplace not finding a home for oil Russia wants to sell is foolish at best.

Edit to add: And just think of what the final crude demand figure will be for 2022 if the IEA number is 98Mb/d now. It'll likely end somewhere near 96Mb/d with no recession or lower if things get worse. I'd love to see how that equates to any possibility of recovery to a new ATH. This article moves likelihood of 2019 global peak demand much higher.

I suppose you're right that Russian crude will get into global circulation somehow. The sanction are not universal and airtight. Even so, sanctions can create certain dislocations, where specific crude does not go directly to where it is specifically needed. For example, even if China were to absorb all Russian exports, this would be a dislocation from where it would have otherwise gone outside of China. I don't mean to belabor the point. It should be clear that dislocations do add cost friction to oil products, a drag on global economic demand.

 

[TheTalkingMule]

It's not in anyone's interest to have full sanctions, so it's not gonna happen. That's my simple thesis.

I've said before, what you want is a halving of crude pricing(at least) and then force Russia to sell 30% below that.

It's all actually in place already, we just need to resolve the 50% trim to futures pricing. End the war. Remove Putin. Whatever. Anything like that should do it because......... DEMAND HAS PEAKED.

 

[jhm]

I'm not completely convinced that demand has technically peaked. But the odds certainly go up the longer oil prices remain above $100/b or even above $80/b.

Remember the great recession of 2009. Recovery was so slow and drawn out in large measure because oil prices remained high until the glut later in the decade. I'm very concerned that the global economy will not be able to recover briskly from the Covid-19 disruption of 2020. We could have malaise for several more years.

It would be awesome economically if oil were 50% off, around $60/b. And that could be low enough that consumption could hit a new ATH in the next year or so. I'm not convinced that the oil industry wants to see the price that low, even if it were to restart the demand growth engine.