The Blue Owl
Endangerous Herbivore
Wow. I detect a tinge of desperation there, going all in like that. They must really feel threatened.
We'll see who blinks first.
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Tesla Investor's General Macroeconomic / Market Discussion
- Thread starter FluxCap
- Start date
We'll see who blinks first.
Gerasimental
Member
So I'm a total newbie when it comes to commodities and global markets, so please feel free to tell me if I'm just being very stupid, but here's my view on the oil situation.
To me, oil seems like a brilliant investment at the moment. Saudi is now basically unable to artificially reduce the price of oil any further via their oil output. They've pretty much tried that, no holds barred, in an attempt to suffocate US oil production but have fallen far short of that (thus, I assume, statements like the one you posted, in the hope of scaring the market and driving it down further). US output looks pretty resilient and prices look like they will need to stay severely depressed (below $60) for a sustained period in order to substantially dent US output. The vast majority of US oil has a break even price of $50 or lower.
Now the Saudi's are in a bit of a pickle. Even with disappointing growth in emerging markets and low global demand, prices don't look likely to plunge below $60, leaving the US market mostly unscathed (even if some investment might be delayed). The low of $58(ish) was reached at a time of panic and I imagine speculators waiting for it to bottom out.
At some point Saudi will have to recognise that they don't have enough clout to suffocate US oil output and will then likely re-adjust their output back down to avoid the market becoming massively oversupplied for a long period of time.
There's already a growing consensus that oil will end 2015 above $70 and there aren't many substantial catalysts left that could put downward pressure on the price (increased output, disappointing growth, speculator panic have all been 'used up' already), short of another full-scale global economic slowdown.
Tl;dr: Even with many strong downward pressures, oil has refused to fall well below $60. OPEC will want to address market imbalance soon. Price can only really go up. Views?
No one knows how low it can and will go, otherwise we'd all be filthy rich betting accordingly. And the Saudis very much do have the capability to bankrupt debt-laden, high-cost oil producers. It's already working, as rigs begin shutting down:
I am pleased, however, that the fluctuations in crude prices have decoupled somewhat from the price of TSLA. Let us hope that continues to be the case.
I am still short oil at the moment.
I am pleased, however, that the fluctuations in crude prices have decoupled somewhat from the price of TSLA. Let us hope that continues to be the case.
I am still short oil at the moment.
Gerasimental
Member
Right, I suppose it's no surprise that I didn't just outfox the entire oil market. Could you explain in more detail how Saudi can still do that?
I would argue that the drop we see in the graph you posted are the 'low hanging fruit', i.e. the marginal rigs in areas with break even prices of around $60. In order to push MOST producers out of the market, oil would need to go lower.
Also, it's a fall of 5% during a period in which oil fell by around 35%. Also there had been that sudden rise in rigs earlier this year, while oil prices were totally flat with no indication of much change, so are other factors not at work here? I don't really know the oil business so I don't know what these could be, but I'm just wondering if the correlation you pointed out is really all that meaningful.
Related question: How does the fact that oil output in the US is not controlled 'from above' but instead is the sum of many private businesses' outputs? I feel like the Saudi plan is more suited to an 'opponent' more similar to itself.
adiggs
Well-Known Member
I imagine that part of the explanation is that rigs are drilling new wells, rather than pumping oil out of already existing wells. I'm an outsider to the business, but I expect there is a significant expense associated with the first barrel of oil from a well, and a pretty minor ongoing expense for most wells for each incremental barrel of oil. Therefore a major drop in the price of oil will first show up in a fast reduction in new wells being drilled, but not necessarily slow down any existing wells.
If you listen to Al Gore and others on this topic, we might also be seeing a behavior where the various countries and companies with oil in the ground are now thinking that we're not going to pump and burn it all. Financially, that means that some % of proven reserved doesn't get converted to cash at some point down the road. If that really is going to happen, then someone with oil in the ground is incented to pump and sell all they can now even while not drilling new wells. I'm still noodling on how much of that idea I buy into, but I am confident that even a little bit of that kind of thinking can lead to long term depressed prices as everybody in the world keeps pumping oil as long as there are people to buy it.
One downside of the nonconventional gas and oil deposits we're tapping in the U.S. is that each well has a short productive life. Production declines by 60-70 percent in the first year. So this decline in new wells also means that production will decline markedly next year and forward.
So we are entering a delayed feedback loop... and maybe undamped oscillation.
Gerasimental
Member
The proportion of global oil produced by these methods isn't enough to really cause oscillatory behaviour. If they had any sense they'd keep their production fairly constant and sell futures in times like these. Constantly ramping up and down production and opening/decomissioning rigs can't be very cost efficient.
jhm
Well-Known Member
Perfectlogic
Member
I was looking at the market price of oil and gasoline and it is pretty interesting how actually 60% of the gas price comes from the refining process, so even if oil was free, gas would still be significantly more expensive than electric. According to Energy & Oil Prices: Natural Gas, Gasoline and Crude Oil - Bloomberg the market price for gas is around $4.8/gal, so the US government looks to be subsidizing the price very heavily, good thing the government doesn't owe $18T or something crazy like that. For comparison the price is around $6/gal in Europe. Do you think US politicians will start discussing a reduction or removal of the gas subsidy in a year or two if the gas price stays low and electric starts to become a serious alternative? Would make sense to me, unless the Koch brothers have too much say in what happens.
Perfectlogic
Member
Looks like I read the numbers wrong, I just assumed the RBOB gasoline was in USD/bbl like the crude as the price looked to be $152, I assume USd means cents then? Well I am glad I got that cleared up, the gas tax in EU must be super high then, as it should be imo.
This makes me think about how the gas tax must be a percentage of oil/gas cost since the, in absolute terms, small drop in wholesale gas prices have lowered the consumer price as much as the full wholesale price here in Denmark at least. That seems like a stupid way of structuring the gas tax, it should be fixed tax as the environmental harm doesn't change, would make for a more stable gas price too.
I was puzzled by the pricing units in the link you sent, but refined products are always measured in gallons (in the US). This chart made clear the units issue and confirmed the $1.52 price. And, yes, EU countries impose very high taxes on gasoline. E.g., Germany imposes €1.27/l on petrol, or about $5.87/gallon. By contrast, federal and state taxes in the U.S. average under $0.50/gallon.
Vger
Active Member
The shale rigs alone do not cause the oscillation, but I believe that the overall macroeconomics will drive increasing volatility set against a backdrop of long-term price increases. Just think about the demand-supply mechanics happening now. Outside the "green" market, there will probably be a surge in demand driven by lower pump prices. Sooner or later, supply will tighten even faster than in previous cycles, and the price will again skyrocket, like in 2008. Humans' limited collective long-term planning dooms us to cyclical macroeconomics; but when the commodity is depleting, the cycling curve will bend up. Just one person's opinion...
jhm
Well-Known Member
Not sure what to file this under, but it is nice to see Pope Francis lead on climate change. The Catholic Bishops have already called for the end of fashion fuels. Any chance Tesla could give a Model X to the Pope? That would be quite symbolic.
Pope Francis Expected To Instruct One Billion Catholics To Act On Climate Change | ThinkProgress
Pope Francis Expected To Instruct One Billion Catholics To Act On Climate Change | ThinkProgress
Gerasimental
Member
The retail price for petrol is currently around €1.20/l here in Germany, so I can guarantee that the figure of €1.27/l in tax is way off the mark. The tax is a fixed rate of €0.6545/l for unleaded and €0.4704/l for diesel. This is still around around 5 times the amount in the US.
This explains, as Perfectlogic mentioned the far greater price stability in Germany compared to the US. In the past decade or so, the highest petrol price has been no more than 50% higher than the lowest. From what I follow of US news, petrol price fluctuations are much more extreme in the US, to the point where they really influence politics.
The Blue Owl
Endangerous Herbivore
For those following the trials and tribulations of the Euro zone (and I think every investor should), here is an interesting article from the WaPo about the upcoming Greek snap election, and what that may mean for the future of the Euro:
The odds of Greece leaving the euro have never been higher.
The odds of Greece leaving the euro have never been higher.
Gerasimental
Member
Vger,
I totally agree with you and I share your opinion that the current situation in the oil market will set off some serious volatility over the next few years. I was merely saying that I don't think the short-term nature of shale oil extraction will be a primary reason for that volatility. It will be fascinating to watch what will possibly be the death throes of this mighty industry.
I totally agree with you and I share your opinion that the current situation in the oil market will set off some serious volatility over the next few years. I was merely saying that I don't think the short-term nature of shale oil extraction will be a primary reason for that volatility. It will be fascinating to watch what will possibly be the death throes of this mighty industry.
That's pretty impressive, Auzie, that you avoided your domestic market. In my not inconsiderable experience, very, very few investors, with the exception of an irrelevant number of ultra-wealthy living in ultra-undesirable states (say, for example, Venezuela), stay out of their home country.
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