Shorting Oil, Hedging Tesla

[Doggydogworld]

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.

China's working age population, which I'll define as 20-65, grew from 904m in 2010 to 930m in 2020. But it's peaking and will be back to 900m by 2030. Then the decline really takes hold - down almost 1%/year to 822m in 2040. That's very Japan-like.

China's economic miracle wasn't primarily driven by population growth, though, rather by population migration. Every year tens of millions of rural folk stopped hand-working tiny plots of land and took factory jobs in cities. Instant jump from ~$400 to 25k annual GDP contribution. Multiply that by 10-25m workers per year and you get a couple decades of 10% annual growth. At least until you run out of rural folk.

I spent some time a decade or so ago trying to calculate when China would hit "peak peasant". I had to use unofficial data since many migrants were "illegal" and technically still lived back in their hometown. (Xi took steps to legitimize these workers, btw). Anyway, I figured China's growth would slow dramatically by 2015 or so. It did fall a bit to 7-8% (officially), then drifted down to 5.9% by 2019.

I figure China still gets a 2-3%/year boost from migration, but the rest of their growth must come form improving productivity of workers already in place. Productivity improves a bit over 1% per year in the first world, but China can improve a little faster as they catch up to first world standards. It's not clear they'll catch all the way up, however, especially with Xi tightening control.

As migration dies out I see China with a 1% annual workforce decline offset by ~3% annual productivity growth. So 2%/year overall growth.

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.

China EV sales are forecast to hit 5.5m in 2022, up almost 5x in 5 years (mostly in the past 3 years). Another 5x in 5 years takes ICE sales down to zero-ish in 2027. S Curves flatten after the midpoint, though, so we'll see how that goes.

Unlike the west, where total fleet size is kinda static as new vehicle sales roughly equal scrappings, China's fleet is still growing rapidly. New ICE sales still have a long way to fall before their ICE fleet starts to shrink. And other oil consumption (aviation, trucking, shipping) will grow for years after light vehicle consumption declines.

It's worth noting that despite China's massive wind/solar additions they keep setting records for coal consumption. In fact, global TWHs from coal just set a new record as China's massive growth offset declines in the west. Getting back to oil, IMHO China's consumption will grow another 5 years, but not by as much as forecasts think.

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.

China watchers have long used electricity generation as a proxy for GDP growth, because they distrust the official GDP numbers.

 

[Oil4AsphaultOnly]

China's working age population, which I'll define as 20-65, grew from 904m in 2010 to 930m in 2020. But it's peaking and will be back to 900m by 2030. Then the decline really takes hold - down almost 1%/year to 822m in 2040. That's very Japan-like.

China's economic miracle wasn't primarily driven by population growth, though, rather by population migration. Every year tens of millions of rural folk stopped hand-working tiny plots of land and took factory jobs in cities. Instant jump from ~$400 to 25k annual GDP contribution. Multiply that by 10-25m workers per year and you get a couple decades of 10% annual growth. At least until you run out of rural folk.

I spent some time a decade or so ago trying to calculate when China would hit "peak peasant". I had to use unofficial data since many migrants were "illegal" and technically still lived back in their hometown. (Xi took steps to legitimize these workers, btw). Anyway, I figured China's growth would slow dramatically by 2015 or so. It did fall a bit to 7-8% (officially), then drifted down to 5.9% by 2019.

I figure China still gets a 2-3%/year boost from migration, but the rest of their growth must come form improving productivity of workers already in place. Productivity improves a bit over 1% per year in the first world, but China can improve a little faster as they catch up to first world standards. It's not clear they'll catch all the way up, however, especially with Xi tightening control.

As migration dies out I see China with a 1% annual workforce decline offset by ~3% annual productivity growth. So 2%/year overall growth.


China EV sales are forecast to hit 5.5m in 2022, up almost 5x in 5 years (mostly in the past 3 years). Another 5x in 5 years takes ICE sales down to zero-ish in 2027. S Curves flatten after the midpoint, though, so we'll see how that goes.

Unlike the west, where total fleet size is kinda static as new vehicle sales roughly equal scrappings, China's fleet is still growing rapidly. New ICE sales still have a long way to fall before their ICE fleet starts to shrink. And other oil consumption (aviation, trucking, shipping) will grow for years after light vehicle consumption declines.

It's worth noting that despite China's massive wind/solar additions they keep setting records for coal consumption. In fact, global TWHs from coal just set a new record as China's massive growth offset declines in the west. Getting back to oil, IMHO China's consumption will grow another 5 years, but not by as much as forecasts think.


China watchers have long used electricity generation as a proxy for GDP growth, because they distrust the official GDP numbers.

I'm having trouble finding a source for 2019-2021 chinese electricity production from coal. Can you help point it out?

From what I've read, china is building new coal power plants to replace heavily polluting older coal power plants, so that muddies the waters on whether electricity from coal power plants is growing or decreasing. The fact that the PM2.5 index has been dropping in all of china's major cities lends hope to the idea that electricity from coal production is NOT increasing (or is at least getting filtered better).

Edit: Coal consumption is very heavy in steel production, so the consumption number confuses construction activity with electricity production.

 

[Doggydogworld]

I'm having trouble finding a source for 2019-2021 chinese electricity production from coal. Can you help point it out?

From what I've read, china is building new coal power plants to replace heavily polluting older coal power plants, so that muddies the waters on whether electricity from coal power plants is growing or decreasing. The fact that the PM2.5 index has been dropping in all of china's major cities lends hope to the idea that electricity from coal production is NOT increasing (or is at least getting filtered better).

Edit: Coal consumption is very heavy in steel production, so the consumption number confuses construction activity with electricity production.

The IEA report at this link probably have year by year numbers (the summary text only says China's coal generation grew 9% in 2021). I'm pretty sure I originally got data from a different source, but don't have a link now. You are correct that China is putting more emissions controls on coal plants (and/or building new ones with better controls). I've also read they really cut down on using coal to heat houses and other buildings. That was horrible for air quality.

 

[ggies07]

For those of you with more knowledge in this thread than me, what do you think about these remarks? He's dreaming right?

Exxon CEO says no new gas cars globally by 2040, goes wolf in sheep's clothing about CO2

Every new passenger car sold in the world will be electric by 2040, according to Exxon Mobil CEO Darren Woods...

electrek.co

However, Woods still claimed this isn’t a threat to Exxon’s business. He said that even if all new cars were electric by 2040, that would only drop oil demand back down to 2013-2014 levels by Exxon’s calculations. Since the company was profitable then, he sees a future where it can remain profitable, even with that level of demand.

 

[TheTalkingMule]

What do you want him to say? 2040 is about as far out as you can push the conclusion of the EV transition, so his comments need to incorporate that.

These guys know they have the press on their bench, so a simple statement is all that's needed. No one's going to actually look into it after all. Has single media outlet mentioned that oil demand has peaked?

 

[ggies07]

What do you want him to say? 2040 is about as far out as you can push the conclusion of the EV transition, so his comments need to incorporate that.

These guys know they have the press on their bench, so a simple statement is all that's needed. No one's going to actually look into it after all. Has single media outlet mentioned that oil demand has peaked?

right right. I agree. I was just wondering what @jhm and others who have data thought about this. I think I remember reading in this thread years ago that only like 2% of a barrel of oil is used for petrochemicals and that's one of the ideas the CEO is leaning on for future profits.

Basically just confirming in here with everyone else that it's BS.

 

[TheTalkingMule]

right right. I agree. I was just wondering what @jhm and others who have data thought about this. I think I remember reading in this thread years ago that only like 2% of a barrel of oil is used for petrochemicals and that's one of the ideas the CEO is leaning on for future profits.

Basically just confirming in here with everyone else that it's BS.

Roughly 70% of petroleum goes to transport I believe. The EV impact will be massive no doubt, @jhm has done some modeling.

The great thing about demand destruction is that you don't only see a drop from fuel demand, but also the barrels of crude used to turn crude into fuel. It's gonna be delightful.

On another topic....no US commercial crude supply report from the EIA. First time I can recall a week not being reported at all. "System issues" they're saying.

 

[jhm]

Yeah, I think the CEO of Exxon is highly motivated to put a happy face on the situation. The language is a little mixed on whether 2040 all cars on the road are EVs or just all new cars. Using current trends, EV penetration at 80% of new vehicles by 2030 is quite possible. Ten years past that, 2040, 80% of all vehicles on the road could be EVs. Indeed policy and substantially lower cost of operation for EVs could send much of the ICE fleet into early retirements. Certainly, by 2050, we need every ICE off the road.

Gasoline and diesel are about 70% of the barrel. We've discussed before that it is really hard for refiners to make dramatic changes to product mix. Capital investments may be required to add processing steps. Furthermore, the shorter carbon chain products, especially those required as petrochem feed stock, can also be sourced as natural gas liquids (NGLs). So there is competition between gas and crude that works against investing heavily in cracking what would have been motor fuels up to PGLs (petroleum gas liquids). Integrated oil & gas players like Exxon will source whatever they can make more money on at the time. I think it is pure folly to believe that petrochem demand will make up for the loss of motor fuel demand.

The amount of economic damage depends critically on how fast disruption happens. If it's slow, then long lived capital assets can retire on schedule. But if it's fast, there will be massive impairments. This is what the Exxon CEO is not really fessing up to. Change can be wicked fast. Happy talk about events that are 18 years away can be truly misleading to investors. I think this is why there could be this mixed language. In a very bad case scenario, virtually all ICE on the road falls into disuse by 2040. Try to imagen a sustained average demand decline of about 3.5 mbpd each year for some 20 years. Imagine some 3.5 mbpd of refining capacity needing to be retired every year. Suppose you have a little glut one year. How does the industry avoid an even bigger glut the second year and third? Oversupply in both refining capacity and crude production can crush margins until a sufficient number of competitors capitulate. In a glut scenario, crude and motor fuel prices could fall to levels where motor fuels dump volume into power generation, competing with gas generators, solar, wind and batteries for pennies per kWh. This leaves practically no margin for refiners. They take a loss on gasoline so that the can make a little margin on jet fuel and a maritime diesel. This is a truly horrible scenario for the oil & gas industries.

Oil and gas compete head to head in the power and petrochem markets. Both become nearly uninvestible because any surplus destroys margin for years. So consumers will just have to compete with each other for available supplies whenever the market is tight. Demand will have to fall to whatever level is being produced because it is too risky to expand production. So consumers relying on petroleum products will be punished with demand destroying volatility.

Should be fun to watch. Popcorn, anyone?

 

[adiggs]

Should be fun to watch. Popcorn, anyone?

I've got me some popcorn and Jan '24 CVX 100 strike puts, now priced at 6.25 (up from 4.00 when I purchased). So far they taste better than popcorn.

Maybe CVX being both a refiner and a miner is a particularly good choice - I have been more thinking that the refiners might be the winners in the coming meltdown as the miners increasingly become price takers, and the refiners are increasingly able to name their own price.

But a significant shift in product mix can also mess them up. I hadn't really thought through the impact of a significant drop in demand for the refined transportation fuels would do for them - especially if its also combined with a shift in the mix of refined product that is profitable. At the very least they'll need to find a new mix and market to keep volumes up. I don't see it.

 

[Doggydogworld]

The great thing about demand destruction is that you don't only see a drop from fuel demand, but also the barrels of crude used to turn crude into fuel. It's gonna be delightful.

Crude is too valuable to burn during refining, at least in the US. In fact, US refineries produce 1m bpd more of refined products than they take in as crude oil. This shows up as "refinery processing gain" in the EIA's various reports. I don't know to what extent this happens in other countries.

Using current trends, EV penetration at 80% of new vehicles by 2030 is quite possible. Ten years past that, 2040, 80% of all vehicles on the road could be EVs.

Roughly half the light vehicles on US roads are >10 years old. So in 2040 you'd have a mix with the newer half being ~90% EV and the older half being much less, say 30%. So it'd be about 60% overall.

 

[TheTalkingMule]

Crude is too valuable to burn during refining, at least in the US. In fact, US refineries produce 1m bpd more of refined products than they take in as crude oil. This shows up as "refinery processing gain" in the EIA's various reports. I don't know to what extent this happens in other countries.

40% of all deep sea cargo is fossil fuels, mostly oil and petroleum products. Forty percent!

10% of all natural gas used in California goes toward steam to extract oil in the Kern oil field.

Certainly it takes fuel to extract, transport, refine, transport crude and the various fuel products. Transporting electrons, like renewable energy itself, it for the most part zero marginal cost.

The point is, we're not just gonna lose the gallons that go into people's tanks.

 

[TheTalkingMule]

On another topic....no US commercial crude supply report from the EIA. First time I can recall a week not being reported at all. "System issues" they're saying.

EIA supply report out today, total supplies(excluding SPR) up 10Mb over the last two weeks. WTI was up to $114 heading into the report at 10:30, now drifting down toward $111. This slow SPR release is working beautifully.

Exports continue to leave the US at full blast. Haven't done the math, but the ratio of exports to production across the last few weeks must be about the highest in recent history.

It's annoying that Putin, Wall Street, and the Saudis are making so much money, but this level of export for the US is a nice cushion in a recession. Couple this with ramping renewables & storage production.....things are looking hyper-stimulative on the other side of this "inflation". We'll have oil prices crack and tumble at the exact time the effects of supply disruptions are dissolving. Should be real nice, so long as the job market holds.

 

[theschnell]

I started a Jan 2023 put position on XOM today. I do think its possible oil has one more big run up higher due to potentially high summer demand and continued maxed out supply, but I'm bearish on the economy longer term in a rising interest rate environment, and I feel like oil is a good way to play that bearish economic outlook (I have also been in and out of a Jan 2023 GM put position for the same reason, but currently am out of it looking for another entry point back in on a bounce).

Anyway, if oil has a big run up, I'll buy more puts, but tired of sitting on the sidelines. Over the longer term, demand destruction at these prices is extremely likely.

 

[iPlug]

U.S. continues to add oil rigs at a pretty decent clip.

Area	Last Count	Count	Change from Prior Count	Date of Prior Count	Change from Last Year	Date of Last Year's Count
U.S.	24 June 2022	753	+13	17 June 2022	+283	25 June 2021

Rig Count Overview & Summary Count | Baker Hughes Rig Count

 

[TheTalkingMule]

EIA supply report out today, total supplies(excluding SPR) up 10Mb over the last two weeks. WTI was up to $114 heading into the report at 10:30, now drifting down toward $111. This slow SPR release is working beautifully.

Building on this update.....here's a chart of total US crude oil & refined products supply(excluding SPR) from around when Russia invaded Ukraine til now.

For perspective, last week's total supply level was right where it was last Christmas. Also the same level as spring 2018 when crude demand peaked in the US. So to recap......supplies are right where they were when demand peaked permanently(undisputed) in the US and we're still producing 10% less than pre-covid.

US producers had pegged their production to meet demand, and now the strategic petroleum reserve release is creating an overhang in supply. That and people aren't buying $5 gas. Continuing on this path should only steepen that upward curve in supplies as more production comes back online in the US and globally as producers scramble for profits while pricing is inflated.

Super strange data point in last week's EIA numbers.......Canada is showing their lowest one week export to the US since 2016. Maybe 4M fewer barrels than a normal week. Could just be a data blip since the EIA seems to be having issues. We'll see if it repeats next week.

 

[iPlug]

These years, refinery capacity seems to be the bigger issue (retirements, maintenance, lack of investment).

...we expect that refinery utilization will reach a monthly average level of 96% twice this summer, near the upper limits of what refiners can consistently maintain. We expect refinery utilization to average 96% in June, 94% in July, and 96% in August.​

​

We estimate U.S. refinery inputs will average 16.7 million b/d during the second and third quarters of 2022. This average is lower than the 2019 refinery inputs average of 17.3 million b/d despite high utilization rates because of reductions in refinery capacity since early 2020. U.S. refinery capacity has fallen by almost 1.0 million b/d since early 2020 because several refineries were closed or converted...​

 

[RubberToe]

Also posted in the energy thread, but since refinery capacity is being discussed. I track California gasoline refining, trying to see when EVs will start eating into the amount of gasoline refined since California has a special blend that I believe is mostly produced in the state. Here are the YTD numbers for the last several years, where each column is YTD data through late June. 2018 was 185 million barrels and 2022 is now 155 million barrels. A drop of (30,000,000 / 180) = 167,000 refined barrels per day:

 

[TheTalkingMule]

Wait til these gouging profits start hitting earnings reports. We should really see some share prices to short.

XOM will likely double profits this quarter to a new record. They're likely scrambling to offset profits and show something a bit lower as we speak, just to avoid the headlines.

Exxon signals operating profits could double over the first quarter

Exxon Mobil Corp on Friday signaled that skyrocketing margins from fuel and crude sales could generate a record quarterly profit, according to a securities filing.

www.reuters.com

 

[TheTalkingMule]

Very interesting turning point of oil markets right now. Could be as simple as traders having plans to pump prices for the entire first half of the year and then get out before a reversal. WTI/Brent both down 8-10% today on "recession fears".

We're seeing XOM whisper numbers of around $16-18B in operating profits for 2Q. Potentially a record high. I think they were sitting around at the end of June with a $20B cash pile that needed to be trimmed for $15.7B to avoid headlines. They've literally been forced into unnecessary capacity investment by their own price gouging.

The Saudis have continued with their month old plan to raise prices for Asia exports even higher. Who exactly is going to pay for them when Russian crude is 30% off? Unclear.

Things are looking real good for a clear as day global oversupply. Thursday's US stockpiles report should be interesting. Hopefully the WH simply maintains their 1Mb/d release from the SPR. That should be plenty to do the job since Wall Street finally seems to have some bears wandering into the conversation.

Citi Says Oil May Collapse to $65 by the Year-End on Recession

(Bloomberg) -- Crude oil could collapse to $65 a barrel by the end of this year and slump to $45 by end-2023 if a demand-crippling recession hits, Citigroup Inc. has warned.Most Read from BloombergPerson of Interest in July 4 Parade Shooting That Killed Six in Police CustodyBezos Slams Biden...

www.yahoo.com

 

[theschnell]

I started a Jan 2023 put position on XOM today. I do think its possible oil has one more big run up higher due to potentially high summer demand and continued maxed out supply, but I'm bearish on the economy longer term in a rising interest rate environment, and I feel like oil is a good way to play that bearish economic outlook (I have also been in and out of a Jan 2023 GM put position for the same reason, but currently am out of it looking for another entry point back in on a bounce).

Anyway, if oil has a big run up, I'll buy more puts, but tired of sitting on the sidelines. Over the longer term, demand destruction at these prices is extremely likely.

Frustrating to see oil down 8% but XOM down only 5%. I guess since it was already down quite a bit from the highs, it has already priced in some of this drop. Anyway, I'll probably go ahead and close it out in the next couple of days, because I can't let such an easy win pass, even though I think oil continues to head lower. I don't know the time frame of that and it's hard to pass on such an easy win, even if the numbers aren't that big yet.