Shorting Oil, Hedging Tesla

[Doggydogworld]

Basically, all the Russian crude is still getting to market.

Most, not all. Seaborne crude is up, but seaborne products are down. Pipeline crude and products are both down. Revenues are up vs. last year, but not proportionally with prices. They're making more money selling less oil.

This, combined with the WH plan of strategic reserve release and demand list to higher fuel prices, is throwing a massive glut of crude onto the market.

Massive glut? Where is all that oil hiding? Inventories were already tight before the war, but they haven't refilled despite all this extra oil you say is flowing.

 

[TheTalkingMule]

They're making more money selling less oil.

At the same ratio as everyone else. They're selling(are able to export) all the crude they care to sell or are capable of extracting at the moment. The point being, this narrative of sanctions or the war having some sort of impact on their ability to export with ease is utter nonsense.

The media line has been, "How will be get by without Russian export supply"? There's no scenario where we have to.

And demand has peaked.

We are, have been since 2015, and from here on out always will be awash in global crude supply.

 

[Doggydogworld]

At the same ratio as everyone else. They're selling(are able to export) all the crude they care to sell or are capable of extracting at the moment.

You keep quoting crude oil. 1/3rd of Russia's pre-war exports were products. Over 2.5m bpd. Their product exports have declined so much they've had to shut down refineries. A few weeks ago Reuters estimated 30% of Russia's refineries were offline. Since internal product consumption is steady that means product exports are down more than 50%. That's 1.0-1.5m bpd in addition to pipeline crude declines. Seaborne crude's ~1m bpd increase is simply not enough to offset these declines.

The EIA sees Eurasia production (almost all Russia) falling 1.2m bpd from Q1 to Q2. You keep saying there is no disruption, but we know for a fact there is. It's nothing like a complete shutdown and it's not as significant as bloviating politicians claim, but the disruption is 100% real and it's big enough (1m+ bpd) to impact the global market.

 

[TheTalkingMule]

I see. It's the refinery capacity now. The last three months the headlines have been all about crude flow disruption.

There is not documented shortage of crude or refined products of any significant amount anywhere in the world. Certainly not in the US or China or Europe.

 

[Doggydogworld]

I see. It's the refinery capacity now.

No, it's not about refinery capacity. Europe cut way back on refined products and the replacement customers (China, India) only want crude. So Russia sends them crude on ships and shutters refineries that no longer have customers. The shuttered refineries are not the cause of the disruption, they are the signal that tells us how much Russian product exports have declined.

There is not documented shortage of crude or refined products of any significant amount anywhere in the world. Certainly not in the US or China or Europe.

There is documentation, you just ignore it. IEA says Russian production fell 900k bpd from March to April then recovered 150k in May.

$5/gal is also documented, on signs at 100k gas stations. Those signs say your crashing demand/massive supply glut theories lack merit.

 

[TheTalkingMule]

There is documentation, you just ignore it. IEA says Russian production fell 900k bpd from March to April then recovered 150k in May.

$5/gal is also documented, on signs at 100k gas stations. Those signs say your crashing demand/massive supply glut theories lack merit.

Neither of those are documentation of a supply shortfall.

There's more excess oil & products floating around US commercial supplies today than at Christmas. Or at the beginning and first few weeks of the war. Or at this time in 2018.

And since nowhere else is transparent, and since all producers purposely try to keep US supplies low for precisely that reason, we can safely assume there's no supply shortage anywhere of significance.

China/Saudi interactions suggest there's no shortfall there, and clearly there's none in Europe.

 

[iPlug]

…both official sanctions and the voluntary “self sanctions” embraced by Western firms seem to be biting. According to Natasha Kaneva of JPMorgan Chase, a bank, Russia is selling roughly 500,000 fewer barrels of refined product a day than it was before the war, and may have been forced to shut down as much as 1.4m bpd of refining capacity in May. The result is an unprecedented shift, argues Richard Joswick of s&p Global, a research firm: “The world has plenty of refining capacity, but the spare capacity is moving into Russia and China.” As a result, he reckons that utilisation rates for refiners in the rest of the world will be much higher than previously envisioned…​

Refiners are providing a fresh source of drama for oil markets

 

[Spacemanspliff]

And demand has peaked.

We are, have been since 2015, and from here on out always will be awash in global crude supply.

If that was the case you would think oil would never be close $120 a barrel.

 

[Spacemanspliff]

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

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.

Well we have got two weeks to try and cut oil in half.

 

[jhm]

If that was the case you would think oil would never be close $120 a barrel.

I'm not sure I buy that. Oil demand is still quite inelastic in the short run, even in post-demand peak world. I think we are in structural decline at this point, but this does not mean that we can't have wickedly high prices. It's a bit like confusing the weather with climate. Even as the climate heats up, we can still experience some really cold weather.

The thing that is I think is more telling is that the oil industry is not jumping in the raise production. They seem to be content just to rake in profits and wait for demand to settle into available production levels. If they really believe that they'd experience robust consumption growth over the next decade, I think they'd be much more eager to increase production. So the rise of EV could be undermining the confidence of oil investors. More immediately, racing to replace Russia production is risky too. The situation is too fluid. In a matter of months, the international coalition imposing sanctions could crumble, leaving the eager producers with a surplus of supply and low oil prices. (I'm not suggesting that it will, but this is a potential scenario.)

The tricky thing with opining and investing around the oil peak is that you've got EVs and other clean tech driving structural change over the course of semi-decades or decades, while there are a multitude of transient issues driving the tightness of the oil market and prices over much shorter time-frames. I think often when we are talking past one another, we are not being entirely clear about differences in time frame. Covid suppressed demand for a little more than a year. The Russia war in Ukraine is suppressing supply for a year or so. These are transient. Meanwhile in the background, the supply of EVs, batteries and renewable energy just keeps growing and steadily eroding demand growth for fossil fuels forcing structural change. It's possible for such things to happen at the same time. And we can argue about which issues we want to focus on in the present moment.

Regarding Putin's war of choice, I think Putin though he could seize the moment where Europe was strapped for gas and oil and leverage it for a military advantage. Moreover, I think he is aware of the coming decline in oil and gas. Had he waited even a year later to try to take Ukraine he'd have had even less leverage from the global dependency on Russian oil and gas. I think Putin massively miscalibrated the will of the Ukrainians to resist militarily, but his timing around the strategic value of oil and gas as a weapon was right on target. Germany has been massively cowed by their stupid dependence on Russian gas. At any rate, to the extent that Putin has be preying on the vulnerable fossil dependencies of Europe to advance his bid to become Imperial Czar, this war is symptomatic of the larger transition happening within the energy underpinnings of the global order. The oil dictators of the world will lose power over the coming years. In vain, they can stir up wars to try to lock in domestic power a few more years. Tyrants rage as power slips between their fingers. So long as the price of oil is high, the oil industry feels it still has some relevance, some importance. But this will not last much longer. One glut will sweep it all a way.

 

[Spacemanspliff]

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.

Why are we comparing 2022 nat gas prices vs 2020 wind/solar, thing is when energy is expensive the costs to produce wind/solar also rise. Id expect wind/solar to still potentially be cheaper but its just poor comparison to do 2022 for one and 2020 for the other.

 

[Spacemanspliff]

I'm not sure I buy that. Oil demand is still quite inelastic in the short run, even in post-demand peak world. I think we are in structural decline at this point, but this does not mean that we can't have wickedly high prices. It's a bit like confusing the weather with climate. Even as the climate heats up, we can still experience some really cold weather.

So long as the price of oil is high, the oil industry feels it still has some relevance, some importance. But this will not last much longer. One glut will sweep it all a way.

He said the world is awash in oil, if that was the case the price should never be reaching what it is. I agree with you that we may be in a structural decline but lack of cap ex will lead to high prices this decade. The oil industry already had their one glut, it was the covid pandemic. I think we will see a economic slow down that will bring oil back in shortly, but once we are on the other side of that I expect to see a few more price spikes.

I'm in this thread to see if any one can change my mind and be open minded but as of now I think shorting oil long Tesla might end up being the worst trade of this future decade.

 

[adiggs]

Why are we comparing 2022 nat gas prices vs 2020 wind/solar, thing is when energy is expensive the costs to produce wind/solar also rise. Id expect wind/solar to still potentially be cheaper but its just poor comparison to do 2022 for one and 2020 for the other.

I agree about the direction in price for everything, given that energy is more expensive today than 2022. The thing is that the cost to produce electricity by burning natural gas varies 100% with the cost of natural gas.

I don't have any numbers to gauge the change in the cost of manufacturing solar panels or installation of those panels with today's higher natural gas (and gasoline, diesel, etc..) prices, but I think you will agree that it is much less than 100%. As a result I expect the direction (though I can't quantify the magnitude) to be in favor of renewables as the price of fossil fuel energy to grow more expensive. I do expect the magnitude to be large enough to show a non-trivial increase in the advantage of costs for renewables.

 

[adiggs]

NOT-ADVICE
Minor update - in late April when CVX shares cleared 170ish I bought some Jan '24 100 strike puts for $4. It was a small position mostly designed for me to have some skin in the game and to have a more tangible personal result from what I expect the price of oil over those couple of years. Its an indirect transfer mechanism for sure but I'm not interested in oil futures. Choosing a more focused oil miner, rather than a more diversified oil miner / refiner / etc.. would probably have also been a better idea.

Those puts have been up and down since then. I believe the low was around $3 a few weeks back. I was even thinking of doubling up had the value of those puts kept going down to $2.

Today I see those puts are a little over $5 as CVX shares are in the 155ish range. Not exactly a substantive change but this is also the closest I've ever come to an actual short of something - so far working out.

EDIT to add: down 1.25 today from 6.50. I like Friday's price better

 

[iPlug]

...we may be in a structural decline but lack of cap ex will lead to high prices this decade...

Also agree we may be in a structural decline and simultaneously have concerns about declining cap ex keeping prices high for years (amidst the ups and downs).

Just a few years ago I would have never believed OPEC+ and Western firms would muster such discipline - managing curtailment of cap ex and holding so tightly to a maintained focus on profitability. But having a hard time seeing this trend changing much in the next few years.

 

[Doggydogworld]

More immediately, racing to replace Russia production is risky too. The situation is too fluid. In a matter of months, the international coalition imposing sanctions could crumble, leaving the eager producers with a surplus of supply and low oil prices. (I'm not suggesting that it will, but this is a potential scenario.)

This is a huge issue for oil investors. They know the current shortages and disruptions were created with the stroke of a pen, and can just as easily be reversed.

Biden is the other big issue. Global all-liquids production grew 13m bpd from 2010-19. Almost 80% of that growth, 10m bpd, came from the US. We became the world's swing producer. We went from being by far the world's largest importer, adding as much as 500b/year to our trade deficit, to a net exporter. US oil and gas investors funded this economic miracle, but they themselves did not do so well. Oil fell below 60/bbl and stubbornly refused to return to "where it should be".

Then Covid hit and poor ROI turned into an unmitigated disaster. Hundreds of billions were written off. Then, to add insult to injury, the most oil-hostile administration in US history took office. Cancelled Keystone XL. Cancelled federal oil and gas leasing. And that was just day one! Overall it became much more difficult to get approval to do anything.

But what about now, when prices are (at least temporarily) high enough to produce good ROI? Does that tempt you to jump back into the oil patch? Maybe put some risk capital out there and grab some of that ROI? Not so fast, Bucky! If your wells come up dry or the price craters, well, that's just the way it goes sometimes. But if you're fortunate enough to hit some winners........ you're a criminal!!!! You should be in jail, but at minimum you deserve to have your "excess profits" confiscated and redistributed to those deemed more worthy than you.

So yeah, investors are a bit reluctant to jump in.

 

[mspohr]

This is a huge issue for oil investors. They know the current shortages and disruptions were created with the stroke of a pen, and can just as easily be reversed.

Biden is the other big issue. Global all-liquids production grew 13m bpd from 2010-19. Almost 80% of that growth, 10m bpd, came from the US. We became the world's swing producer. We went from being by far the world's largest importer, adding as much as 500b/year to our trade deficit, to a net exporter. US oil and gas investors funded this economic miracle, but they themselves did not do so well. Oil fell below 60/bbl and stubbornly refused to return to "where it should be".

Then Covid hit and poor ROI turned into an unmitigated disaster. Hundreds of billions were written off. Then, to add insult to injury, the most oil-hostile administration in US history took office. Cancelled Keystone XL. Cancelled federal oil and gas leasing. And that was just day one! Overall it became much more difficult to get approval to do anything.

But what about now, when prices are (at least temporarily) high enough to produce good ROI? Does that tempt you to jump back into the oil patch? Maybe put some risk capital out there and grab some of that ROI? Not so fast, Bucky! If your wells come up dry or the price craters, well, that's just the way it goes sometimes. But if you're fortunate enough to hit some winners........ you're a criminal!!!! You should be in jail, but at minimum you deserve to have your "excess profits" confiscated and redistributed to those deemed more worthy than you.

So yeah, investors are a bit reluctant to jump in.

I think this is a good thing.
Most important, don't drill.
Also, high prices will drive demand destruction.

 

[mspohr]

I think this is a good thing.
Most important, don't drill.
Also, high prices will drive demand destruction.

High fossil fuel prices are good for the planet—here’s how to keep it that way

Switching to renewables will only happen if gas prices remain expensive.

arstechnica.com

First, consumers will not accept high prices if it means high profits for fossil fuel companies. Maintaining high prices for consumers must be complemented by a radical overhaul of the taxation regime facing fossil fuel companies, not just one-off windfall taxes. Those taxes would maintain high consumer prices even though the fossil fuel companies wouldn’t actually receive very much—enough to cover reasonable costs, but not enough to invest in further fossil fuel production. As the International Energy Agency has pointed out, to achieve net zero by 2050, the amount of investment needed in new oil and gas production is zero.

Getting an annual payment, equal to the taxes imposed to keep fossil fuel prices high, would cushion the hurt from higher prices. It would also be progressive, since those who consume the most fossil fuels would pay more in tax, while those who consume little would pay less but receive the same payment from the fund and therefore end up in profit. There might also need to be additional compensation for poor groups with high fossil fuel usage, such as people on lower incomes who have to use their cars for work.

 

[jhm]

China May No Longer Be A Pillar Of Growth For Global Oil Markets | OilPrice.com

For decades, China’s thirst for crude has grown at a remarkable pace, but as its economy continues to slow, so will the appetite for oil

oilprice.com

Ok, what do we think about this one? The author is not only contemplating a short-term slow up of economic growth for China, but a long-term Japan-like stagnation. Seems a little overdone.

I've noticed that when the oil press is worried about a slow up in oil demand, they typically try to make the whole economy sound like demand is falling for everything. Sure Covid-19 is a transitory issue, but the author seems worried about long-term oil demand in China.

Could China be nearing its oil demand peak? Sure. China is moving blazing fast with EVs and renewable energy. At some point that's got to hit the critical threshold where all fossil fuel demand retreats and the economy continues grow at a healthy clip. I'm just not seeing why China should be facing Japan-like stagnation. Even if population ceases to grow, per capita GDP can still roughly triple just to catch up with the US and other affluent countries. So that is massive upside to China's GDP over the next several decades.

If in your heart of heart you believe that economic growth is only possible if coupled with growth in fossil fuel demand, then you'll need to be in massive denial about either peak oil in China or must believe in a stunted Chinese economy.

Could there be any investment play here for those of us who are not stuck on oil economy coupling?

 

[jhm]

We've discussed over the years the idea that once oil demand peaks in China we are definitely at or past the global peak. The argument goes like this. OEDC have already gone post peak for quite some time. So the global peak is determined by how much growth there still is amongst non-OECD countries. China has the biggest oil demand growth engine amongst non-OECD countries. India is a second runner up. So as oil demand growth slows in China, the industry looks to India to be the alternative source of demand growth. But it is really doubtful that India will be able to fully replace China as a growth engine. So once Chinese demand begins to decline, there probably won't be enough growth in non-OECD countries to make up the decline in OECD countries.

This is a descriptive argument, but it can be made much more precise by looking at data. But the importance of China is not merely the size of its oil market. China has been the fastest growing economy of the developing world. So if oil demand decouples from the Chinese growth economy, this is a profound shock to over a hundred years of economic history. An awful lot of our econometric models will have to be rebuilt when China oil demand peaks. Most modelers and economic thinkers will be lost and confused. They will have to shift their thinking and might realize that the global economy is more strongly linked to electricity generation than oil consumption. The whole transition to renewable energy will force this shift from oil being at the core of economic growth to electricity.