Shorting Oil, Hedging Tesla

[TheTalkingMule]

New idea. Perhaps @jhm or another math mind could help out with a simple equation.

Let's take executive action to link the domestic supply of oil to quarterly windfall tax rates on US listed oil & gas companies.

If you're gonna collude to limit supply, or more precisely create the appearance thereof, you're gonna lose that entire premium and then some.

There is no incentive out there for anything but unresquested sodomy.

 

[eleison]

New idea. Perhaps @jhm or another math mind could help out with a simple equation.

Let's take executive action to link the domestic supply of oil to quarterly windfall tax rates on US listed oil & gas companies.

If you're gonna collude to limit supply, or more precisely create the appearance thereof, you're gonna lose that entire premium and then some.

There is no incentive out there for anything but unresquested sodomy.

So if the oil companies lose money like under covid while outputing the same amount of oil, the government gives them more money?

From what I hear smaller oil companies went bankrupt during covid. Instead of letting them go bankrupt, the government should have bailed them out?

 

[TheTalkingMule]

So if the oil companies lose money like under covid while outputing the same amount of oil, the government gives them more money?

From what I hear smaller oil companies went bankrupt during covid. Instead of letting them go bankrupt, the government should have bailed them out?

No. If "supply" is so low that prices get to insane levels and profits surge as they have, one-time windfall taxes. This calculation(and windfall tax) would be applied every quarter.

Basically, provide incentive for a price cap. Rather than try to create one by brute force.

 

[eleison]

No. If "supply" is so low that prices get to insane levels and profits surge as they have, one-time windfall taxes. This calculation(and windfall tax) would be applied every quarter.

Basically, provide incentive for a price cap. Rather than try to create one by brute force.

Wouldn't a price cap also incur a supply cap? If oil companies produce too much oil, they would lose money... However, if they produce too little oil, they would lose money (windfall taxes).

After a while, oil companies would do their research and figure out the output that would give them the most money, while avoiding the windfall taxes. This output could be independent of the public good. Also, sometimes that output point could make it unwise to look for more oil and invest in more equipment.

It's like telling Apple they can only charge a certain amount for their phones. If they make too much profit, they will be charged a windfall tax. After a while, Apple will just figure out the maximum they should charge, they would avoid looking for ways to upgrade their equipment to make iphones cheaper (afraid of too much profit because of higher profit margins) or avoid investing in the future because if they get too much profit, they will be charged a windfall tax..

This seems stifling to me and counter productive especially for smaller oil companies. It just wouldn't be worth the risk to invest in finding and extracting more oil when the rewards just aren't there.

 

[jhm]

The basic problem with the windfall tax is that is limits the upside returns on investments in expanding the oil supply. There is no need to collude about it. This will discourage investment, which in turn will lead to a tight market and high oil prices. Ironically, the politicians proposing this think that it is a way to limit "greed" and thereby keep oil prices lower. It will have the opposite effect. High oil prices will happen because oil buyers will bid up the price on a more limited supply. It's not really about the greed of suppliers, but the demand of buyers.

On twitter I got massively flamed once for suggesting that we should go ahead and allow oil companies to "price gouge" as it was time to convert to renewable energy and EVs. Apparently there are lots of angry voters on Twitter to very much believe that if you punish oil producers with a windfall tax, it will result in lower oil prices. So even if a politician understood the economic fallacy expressed in this, they might have to go along with the economic naivety of their constituents.

Please don't flame me.

 

[mspohr]

The basic problem with the windfall tax is that is limits the upside returns on investments in expanding the oil supply. There is no need to collude about it. This will discourage investment, which in turn will lead to a tight market and high oil prices. Ironically, the politicians proposing this think that it is a way to limit "greed" and thereby keep oil prices lower. It will have the opposite effect. High oil prices will happen because oil buyers will bid up the price on a more limited supply. It's not really about the greed of suppliers, but the demand of buyers.

On twitter I got massively flamed once for suggesting that we should go ahead and allow oil companies to "price gouge" as it was time to convert to renewable energy and EVs. Apparently there are lots of angry voters on Twitter to very much believe that if you punish oil producers with a windfall tax, it will result in lower oil prices. So even if a politician understood the economic fallacy expressed in this, they might have to go along with the economic naivety of their constituents.

Please don't flame me.

Much preferable to raise the price of fuel with taxes. That way the government benefits and can redistribute the revenue to adjust for inequalities

 

[mspohr]

Business Insider: Russia worse off than Europe over gas supply cuts to EU, study finds.

Europe is hurting because Russia has cut down its natural-gas supply — but Russia is even worse off: study

Russia is "hurt the most" in the long run by shifting natural-gas supply chains, study authors from Yale University wrote in a July 20 analysis.

www.businessinsider.com

Russia has slowed its natural-gas supplies to Europe since invading Ukraine — and the commodity giant is under "severe strain" because of it, a Yale University analysis found.

"Contrary to widespread alarmism over the adverse impact of the Russia-Ukraine war on global commodity prices, the importance of commodity exports to Russia far exceeds the importance of Russian commodity exports to the rest of the world," the Yale researchers wrote in the analysis, released July 20.

 

[eleison]

Business Insider: Russia worse off than Europe over gas supply cuts to EU, study finds.

Europe is hurting because Russia has cut down its natural-gas supply — but Russia is even worse off: study

Russia is "hurt the most" in the long run by shifting natural-gas supply chains, study authors from Yale University wrote in a July 20 analysis.

www.businessinsider.com

Russia has slowed its natural-gas supplies to Europe since invading Ukraine — and the commodity giant is under "severe strain" because of it, a Yale University analysis found.

"Contrary to widespread alarmism over the adverse impact of the Russia-Ukraine war on global commodity prices, the importance of commodity exports to Russia far exceeds the importance of Russian commodity exports to the rest of the world," the Yale researchers wrote in the analysis, released July 20.

So the Ukrainian war will end soon with a Ukrainian victory?
It's been months now...

 

[TheTalkingMule]

Chevron and Exxon both have a PE around 10-11. Bananas.

 

[mspohr]

So the Ukrainian war will end soon with a Ukrainian victory?
It's been months now...

Probably like the US war in Afghanistan. Long stalemate and eventual capitulation by Russia
But. The sanctions will continue and will severely affect Russian economy.

 

[mspohr]

The world is ablaze and the oil industry just posted record profits. It’s us or them | Hamilton Nolan

No single crisis, no matter how existential, will be enough to shut this machine down naturally. We must break it or it will break us

It is useful to think of capitalism as a robotic savant, spectacularly gifted at doing one thing and cripplingly blind to everything else. Global capitalism is an incredible machine for extracting fossil fuels from our planet, refining them, shipping them to every corner of the Earth and making staggering amounts of money doing so. The humming of this machine, the fuel and the money that it spits out, has powered a century of unprecedented production and consumption by the Earth’s first-world nations. Unfortunately the machine is also poisoning us all. But one of its exquisitely evolved functions is to make it almost impossible to turn it off.

Capitalism is not designed to look several generations down the road. It is not designed to sacrifice for the greater good. It is designed to maximize profits. To pump every last barrel of oil on Earth, sell it, take the money and build a luxurious space ship to leave the planet that has been destroyed by burning all of that gas is a perfectly rational course of action according to the logic of capitalism. As long as there is a trillion dollars a year to be made, the fossil fuel industry will take the money. It is enough money to build a nice villa far, far away from the wars and droughts and floods and wildfires that fossil fuels are causing.

The price of oil fluctuates, but that short-term volatility masks the industry’s long-term certainty of success. A recent study showed that for the past 50 years, the oil industry has made profits of more than $1tn a year, close to $3bn a day. These profits are driven not by some fantasy of free enterprise and perfect competition, but by the exact opposite – cartels, mega-corporations and the regulatory capture of governments, conspiring to create a market free of both competition and of a price that reflects the actual cost to the world of the product that is being sold.

 

[mspohr]

And capitalism at work.

African nations expected to make case for big rise in fossil fuel output
.Leaders of African countries are likely to use the next UN climate summit in November to push for massive new investment in fossil fuels in Africa, according to documents seen by the Guardian. New exploration for gas, and the exploitation of Africa’s vast reserves of oil, would make it close to impossible for the world to limit global heating to 1.5C above pre-industrial levels. However, soaring gas prices have made the prospect of African supplies even more attractive, and developed countries, including EU members, have indicated they would support such developments in the current gas shortage.

 

[Doggydogworld]

And capitalism at work.

Indeed, life will improve dramatically once we outlaw free markets and turn total control over to politicians and bureaucrats. Confiscation of wasteful long-range BEVs will begin immediately so that each battery can be broken up and put into multiple Hongguang Minis for the proletariat to drive.....

Here's an article about US refinery capacity. We haven't built new ones in a while and a damaging flood or fire often leads to closure instead of rebuild.

Twice as much refining capacity has shut down in the past three years as in the preceding 10 years.

They mention conversion to biodiesel, which is mostly a scam -- i.e. grab gov't bucks and save on EPA cleanup costs by 'converting' the 120k bpd Rodeo refinery into a 8k bpd biodiesel plant instead of just shutting it down. And they talk about global warming causing more hurricane damage, which is a 3rd order effect. There are five larger reasons behind today's high margins, the first three of which they mention:

• Overbuilding led to sustained low margins
• Premature demand decline forecasts discouraged capex
• Increasing regulation
• COVID which turned the low margins negative
• Sanctions put some Russian refineries offline*

Except for increasing regulation, which ranks up there with death and taxes, these issues are cyclical or temporary. At some point demand will start a real decline and ease the capacity crunch. Meanwhile high margins will overcome the reluctance to invest and a new capex cycle will begin. Unless Biden confiscates those margins with a 'windfall profits tax', that is.
__________________
*Some might question how idled Russian refineries affect the US, but the global products trade is large enough to link markets. For a long time we've sent diesel across the Atlantic and they've sent gasoline back. Now they're in a self-imposed crisis so they want even more diesel, but don't want to send us gasoline. If we had spare refinery capacity it wouldn't be a big deal, but as outlined above we do not.

 

[mspohr]

Big Oil is wringing humanity dry. We need a fossil fuel non-proliferation treaty | Tzeporah Berman

Energy prices alone won’t be enough to drive the kind of decarbonization needed to meet climate goals. For decades climate policy has been designed based on a theory that we can reduce demand for fossil fuels and increase the price of carbon and that the market – turbocharged by alternatives such as wind and solar that are now cheaper than fossil fuels – will respond by constraining supply. But that’s not happening fast enough because there is currently no mechanism to counteract the tax breaks, fossil fuel subsidies and delay tactics that are distorting the markets.

 

[TheTalkingMule]

So when do we short Chevron?

These obscene earnings aren't going to let up, so I don't see much point in shorting them now that their PE is only 10. And 3Q is going to take their TTM EPS from $15 today to $17+. 4Q would have an even greater impact without a major move down in futures pricing.

Foolish to short into that when today's SP will translate to an 8-9 PE by mid October. Or even 6-7 in mid January if they beat as expected. All this while yielding 3.6%(or more if they raise the dividend). I'm not messing with that unless SP goes +25% from here and crushes their ATH.

Looking at this EPS chart, I think we can see where the y-o-y impact of this price gouging ends. Maybe once 4Q22 earnings are printed would be a good spot to buy puts? EPS would be around $22, up from $15 today. They'd be set to go up more after 1Q, but not by as much and likely WTI/Brent pricing will have cooled a LOT by then.

Concerns would be that Russia backs out of Ukraine and futures crash to nothing. This is gonna be hard to call. I'm not comfortable buying puts today, but would jump all over it if we can get past 4Q earnings and Chevron's PE is still 10+.

That would be a SP around $220 and I'd be buying something like 2025 $120 puts.

I usually get 30% too greedy, so with a curve it's likely best to short 3 weeks after the next earnings call.

 

[adiggs]

So when do we short Chevron?

These obscene earnings aren't going to let up, so I don't see much point in shorting them now that their PE is only 10. And 3Q is going to take their TTM EPS from $15 today to $17+. 4Q would have an even greater impact without a major move down in futures pricing.

Foolish to short into that when today's SP will translate to an 8-9 PE by mid October. Or even 6-7 in mid January if they beat as expected. All this while yielding 3.6%(or more if they raise the dividend). I'm not messing with that unless SP goes +25% from here and crushes their ATH.

Looking at this EPS chart, I think we can see where the y-o-y impact of this price gouging ends. Maybe once 4Q22 earnings are printed would be a good spot to buy puts? EPS would be around $22, up from $15 today. They'd be set to go up more after 1Q, but not by as much and likely WTI/Brent pricing will have cooled a LOT by then.

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Concerns would be that Russia backs out of Ukraine and futures crash to nothing. This is gonna be hard to call. I'm not comfortable buying puts today, but would jump all over it if we can get past 4Q earnings and Chevron's PE is still 10+.

That would be a SP around $220 and I'd be buying something like 2025 $120 puts.

I usually get 30% too greedy, so with a curve it's likely best to short 3 weeks after the next earnings call.

I bought some CVX 100 strike Jan '24 puts in April when the shares were a little over $170. So far - in at $4 and currently worth $5.30.

That the quarterly results were SO good and the shares today are $153ish is ... interesting. Oil seems to be down about $10 since April ($100 down to $90) so maybe that is the primary mover of the share price, rather than EPS.

Either way it makes for a nice view into how the market sees at least this oil miner and the industry - the commodity price is up bigly, the company's earnings are up bigly, but the share price is not really moving as a result.

I think, without any particularly deep research, that this is what the early days of the demise of coal market valuation looked like. Remember that coal lost >99% market value over a 10ish year stretch while its share of the US energy budget went from ~30% to ~25%. Mostly the same volume of product delivery, but the value of that delivered product went down. More importantly the market valuation of that delivered product plummeted.

 

[Doggydogworld]

So when do we short Chevron?

These obscene earnings aren't going to let up....

For months you've said an oil price collapse is imminent, now you say crazy-high earnings will continue? Which is it?

Remember that coal lost >99% market value over a 10ish year stretch while its share of the US energy budget went from ~30% to ~25%. Mostly the same volume of product delivery, ...

Coal generation dropped from 2000 TWh in 2008 to 800 TWh in 2020. Global oil consumption would have to drop 5m bpd each year to match that. Even a global ICE car ban wouldn't reduce consumption that fast.

There's another issue, oil wells have a natural decline curve. If you stop drilling new wells supply will automatically fall a few percent per year (much faster with shale). Mines are more like factories -- you install machinery with a certain capacity and mine that amount every year for decades. It doesn't take much of a demand decline to create overcapacity.

 

[TheTalkingMule]

For months you've said an oil price collapse is imminent, now you say crazy-high earnings will continue? Which is it?

Just because the spot price drops by half 3 weeks from now doesn't meant Chevron ain't getting paid ~$85/b all the way thru 4Q.

And I was looking at PE + dividends. 3Q and 4Q 2021 we're absolute crap, even if they perform on the low end of my expectations it's still a huge expansion of TTM EPS.

 

[TheTalkingMule]

And now the collapse is imminent. WTI is drift to lows we haven't seen since Jan/Feb as the WH tactic of releasing the SPR is really taking hold and building commercial supplies.

Oil falls to 6-mth low on economic data, awaits news of Iran nuclear deal

Oil prices fell about 3% on Tuesday to their lowest since before Russia's invasion of Ukraine as economic data spurred concerns about a potential global recession, while the market awaited clarity on talks to revive a deal that could allow more Iranian oil exports.

www.reuters.com

Now the spectre of an Iran deal bringing another 1Mb/d into the market could put the nail in the coffin. Especially considering the 10Mb they have sitting in storage waiting for a buyer.

Even without Iran, people are waking up to the fact of all Russian exports still finding their way to the world market.

And we find ourselves 1/3 of the way into a global recession to boot.

Barclays sees crude surplus in near-term, cuts Brent price view

Barclays lowered its Brent price forecasts on Tuesday by $8 per barrel for 2022 and 2023, as it expects a large surplus of crude oil over the near-term due to "resilient" Russian supplies.

www.reuters.com

Kinda wish I understood WTI futures a bit more. Doesn't a scenario such as this create massive demand for contracts? If I'm a US fracker, I'd be buying up any commitments I can get my hands on that would pay me more than $70 for a future barrel of oil.

Even knowing little about the actual function of these markets, it's clear as day there must be a reckoning for all this gouging and manipulation. Logically I can't think of where the bottom will be.

 

[TheTalkingMule]

WTI shot from $86.50 to $89 this morning, as I guess some of the headline WTI numbers got passed around to the shady traders. "US Commercial Oil Supplies Down 12.6M Barrels!"

Then the report came out at 10:30 and people realized net exports increased by 16.5M barrels last week.

They're pulling out all the stops to make this market appear tight, but it's not fooling anyone. Look for next week's report to be a hot mess since any supply they pushed off to this week will hit the report.

Also of note, the strategic reserve was only down 3.4M barrels, not the 7M that was directed by the WH to release each week. Hopefully they're not packing off this policy now that pricing is coming down. You gotta absolutely bury these guys to break this trade.

Edit: Or as CNBC would say, "It's not low domestic oversupply.....it's high export demand!". Lol