What To Make of Tesla’s Rise and Big Oil’s Woes

Tesla’s stock price has been soaring. Its market capitalization now exceeds that of Ford and GM combined. Meanwhile, the shares of virtually every oil and gas producer are down sharply to start the year. Shares of ExxonMobil, once the world’s biggest publicly traded company, hover near a 10-year low. What’s going on? Are electric cars about to take over the auto industry and banish the need for oil?

The short answer: No. The slightly longer answer: It’s complicated, but still no.

The reason for Tesla’s meteoric share price increase this year is hotly debated among financial analysts. Some attribute it to Tesla’s production ramp-up that points to a profitable future for a company that, to date, has never turned an annual profit. Others point to short covering, in which investors who had bet that Tesla’s stock would fall are now scrambling to close out those bets by buying shares. I don’t claim to know more than the folks on Wall Street do. I’m more interested in the larger market forces that will rule the fate of Tesla and its rivals.

There’s no question that the market for electric vehicles is growing, as I wrote last fall. And Tesla specifically is growing its sales. In 2019, it delivered 367,000 cars worldwide, a 50% jump from the year before. It opened a plant in China in record time, and aims to build another in Germany to serve the European market.

That’s all well and good, but does it justify the stock price rising from less than $200 last summer to nearly $800 today? Remember, this is a company that lost $862 million last year.

To believe that Tesla’s share price is justified and destined to keep rising, as many Tesla bulls do, you need to believe that electric vehicles are going to rapidly gain market share, and that Tesla is going to dominate that market. There are reasons to question both of those assumptions.

First, EVs aren’t exactly threatening to displace the internal combustion engine just yet. Website InsideEVs reports that in 2019, U.S. sales of all plug-in vehicles (not just Teslas, and including plug-in hybrids that still use gas) came in a bit under 330,000, versus total U.S. auto sales of about 17 million. That was actually down from 2018’s sales figure for plug-ins. It appears that EVs are still a tough sell for the typical American car buyer, especially when gas is relatively cheap.

Second, it’s not like Tesla’s competitors are standing still. Both legacy automakers such as Ford and GM, and startups such as Rivian, are readying new EVs of their own. Notably, all of those companies are planning electric SUVs or pickup trucks, the most popular – and lucrative – segments of the U.S. market. Meanwhile, Porsche has unveiled an electric sedan that has drawn rave reviews for its sporty performance. It’s pricier than the comparable Model S from Tesla, but in a recent comparison, the editors of Car and Driver magazine found the Porsche more entertaining to drive.

My take: Tesla’s recent successes are real, but it’s premature to declare it the unquestioned king of the EV market, or even to assume that EVs are destined to displace conventional gas-powered vehicles anytime soon.

Oil: The New Tobacco?

What about the companies that depend heavily on the continued success of the internal combustion engine? The stocks of oil companies are off to a miserable start this year, and have lagged behind the broader market for roughly a decade. CNBC commentator Jim Cramer last week declared that oil stocks are in the “death knell phase” and compared them with tobacco companies. He said that money managers are getting out of the sector in response to pressure from environmental activists, which makes the stocks too dangerous to recommend.

He’s certainly right about the pressure on money managers to divest from fossil fuel investments. But is the comparison of smoking to burning fossil fuels apt?

The number of smokers in the U.S. has plunged over the past half century or so. Cigarettes are highly addictive, but they’re not strictly speaking necessary, as proven by the number of people who have quit. Meanwhile, it’s pretty tough to “quit” fossil fuels such as oil and natural gas. For most people, that would mean giving up heating their home in the winter; traveling beyond the range of a bicycle trip; or buying anything made or shipped with petroleum (which is pretty much everything). The vast majority of cars on the road, and pretty much every truck, train, plane or ship, runs on some form of petroleum (with some corn-based ethanol mixed in to the gasoline). Tesla could sell 10 times as many electric cars this year as it did last year, and oil demand wouldn’t fall much. (In the U.S., natural gas demand would actually rise to generate the additional electricity needed to charge them.)

There’s something to Cramer’s thesis, but again, I think the point is a bit overblown. Electric cars aren’t ready to displace the hundreds of millions of gas-powered cars on the road globally, and batteries are nowhere near ready to power planes or freight trains or other heavy-duty vehicles. In the long term, renewable energy and EVs are certain to proliferate, but the world’s also going to consume huge quantities of oil and gas for a long time to come.

I’m certainly not saying to sell Tesla or buy oil stocks. Just keep in mind that the narrative the stock market is telling about these companies may have gotten a little bit ahead of the reality.

Facial Recognition Technology Is Set to Take Off

Facial recognition technology will see a surge of new interest in 2020. The tech has made huge strides in the past few years, becoming faster, more accurate and cheaper, sparking new attention from retailers, hospitals, schools, manufacturers and more.

New uses range from spotting school threats to identifying VIP customers. Continue reading “Facial Recognition Technology Is Set to Take Off”

Post-Impeachment Hangover to Linger Over Capitol Hill

While the impeachment trial of President Trump is over, its shadow will linger over Capitol Hill indefinitely. Among its legacies will be a further erosion of across-the-aisle cooperation, comity and trust. If you’re hoping for a kumbaya moment between the parties, don’t hold your breath.

Congress already was bedeviled by toxic partisanship long before impeachment or Trump’s presidency. In 21st Century Washington, lawmakers view members of the other party as rivals, not coworkers elected by the American people to work together to make the country a better place. Bipartisanship is often considered a dirty word on Capitol Hill. Continue reading “Post-Impeachment Hangover to Linger Over Capitol Hill”

Trump Impeachment Trial Nears Its End Game

Opinions and positions die hard on Capitol Hill. So, after eight gruelling and mostly long days of the Senate impeachment trial of President Trump, few if any minds among the senators – and probably the public as well – have changed.

Day after day, lawmakers of both parties continue to recite the same talking points, the same positions, the same partisan rhetoric as they did on the trial’s opening day a week ago Tuesday. Continue reading “Trump Impeachment Trial Nears Its End Game”

Oil Sinks on Mounting Coronavirus Fears

The Chinese coronavirus isn’t just a public health crisis. It’s also a major threat to commodities markets, given that China is the world’s biggest consumer of most industrial materials. That’s especially true for oil, the price of which is sinking fast as fears of a possible pandemic mount.

At this point, it’s too soon to say just how serious the current outbreak will turn out to be. And thus, it’s too soon to know exactly how much it will affect global oil markets. But traders are clearly nervous. Benchmark West Texas Intermediate crude has fallen from about $58 per barrel last week to $53 now, as it became clearer that the mystery virus has spread faster than Chinese officials had previously admitted.

It’s not hard to see why oil prices are tanking. China is the world’s largest importer of crude and refined products. Its massive economy consumes about 14 million barrels of petroleum per day, according to the International Energy Agency. That puts China second only to the U.S., at roughly 20 million barrels per day. (And unlike China, the U.S. can largely meet its needs from domestic supply thanks to the fracking revolution.) What’s more, China is a major source of new demand in the global oil market. Last month, the IEA noted that developing economies are now driving global demand higher as mature economies start to burn less petroleum. China is at the forefront of that trend.

Bans on travel already cover more than 50 million people in China. If those restrictions spread, the hit to oil demand will get even worse. Meanwhile, there’s the risk that international air travel could suffer as more cases pop up outside China and other countries seek to keep out infected travelers. As of 2017, global jet fuel consumption accounted for nearly 7% of total oil demand, according to the Department of Energy.

Presumably, China isn’t going to shut down all internal travel. And international air travel isn’t coming to a complete halt. But any long-lasting drop in these sources of demand would likely be enough to measurably lower oil prices.

Not nearly enough is known at this point to forecast how prices will respond to the virus. But I think a few different scenarios can be sketched out. If authorities in China and elsewhere can get the disease under control quickly, the impact on oil demand should be modest and prices should rebound to their previous levels fairly quickly. If the number of infections and deaths continue to grow rapidly, demand figures to suffer badly, and WTI could sink below $50 per barrel. That would mean even more pain for energy companies already reeling from rock-bottom natural gas prices. A scenario somewhere in the middle, with infections spreading but not fast enough to trigger major travel and shipping shutdowns, would likely keep oil prices somewhat depressed. In that scenario, I would look for WTI to trade somewhere near $55 per barrel until the crisis passes.

In the longer term, I expect oil prices to gradually head higher. OPEC continues to limit its production, and there are rumors that the cartel will institute steeper cuts if Chinese oil demand shrinks significantly. Fighting in Libya has crimped that country’s production. Energy companies in the U.S. are cutting back on drilling new wells. And the recent armistice in the U.S.-China trade war should give the global economy a modest boost. All of those factors point to lower supply or stronger demand, which in turn should support prices. But until the specter of the coronavirus is removed, none of those factors is likely to matter.

Natural Gas: How Low Can It Go?

The price of natural gas has slumped to a four-year low. And it shows little sign of recovering anytime soon.

How cheap are we talking? Gas futures recently traded at $1.90 per million British thermal units, versus about $3 per MMBtu at this time last year. Prior to the ramp up in domestic production unleashed by hydraulic fracturing, gas routinely traded above $5 or even $10 per MMBtu. (And that’s not accounting for inflation.)

U.S. gas consumption is higher than ever, thanks to strong demand from gas-burning power plants as utilities shut down coal-fired plants. And energy companies are exporting a record amount of the stuff, both via pipelines to Mexico and in liquefied form to buyers all over the world. Yet all that demand hasn’t been enough to prevent an epic price rout, because gas production has grown even faster.

Why do energy companies keep producing more gas when its price keeps dropping? In many cases, they can’t help it. A sizable portion of America’s gas output is the byproduct of oil wells in places like the Permian Basin of Texas and New Mexico. Gas that comes up with the oil is routinely sold off for cheap, if not simply burned off at the well site. And although oil drilling activity has declined lately because of cheaper crude, it’s still going fairly strong.

Much of the recent gas price decline owes to unseasonably warm weather across large swaths of the U.S., which has kept heating demand lower than normal. Stockpiles of gas in underground storage are high for this time of year, and weather forecasts aren’t showing any severe cold outbreaks powerful enough to put a dent in those supplies. Spring isn’t far away, which means the current glut could grow even worse if the current warm trend doesn’t end soon. Plus winter is proving relatively mild in other big gas markets, such as Europe and Asia. So international benchmark prices for liquefied natural gas are also falling. Hence the U.S. price sell-off, say analysts at S&P Global Platts.

All of this is bad news for gas producers, from the diversified oil and gas “majors” such as ExxonMobil and Chevron, to more gas-focused companies, such as Antero Resources and EQT. Exxon, in its third-quarter earnings call, noted that “natural gas prices…remained challenged by market imbalances.” That’s putting it mildly. No wonder that the shares of energy companies have lagged so badly behind most of the rest of the stock market lately.

Of course, gas producers’ pain is consumers’ gain. But it depends on which consumers you’re talking about. According to data from the Department of Energy, commercial and industrial customers mostly paid less for gas in 2019 than they did during the comparable periods of 2018. (The DOE hasn’t tabulated full-year price data yet.) Ditto for electric utilities, even as gas-fired power plants continue to displace coal plants. But residential customers haven’t been benefiting yet. Through the first 10 months of 2019, the average residential price was a tad higher than it was a year earlier.

Natural gas prices are notoriously volatile in the short term. In the long term, it seems reasonable to believe that rising domestic consumption plus growing exports should bring demand into better balance with supply, giving prices a boost. But investors looking for a sustained price rebound are probably in for a long wait.

Senate Goes Back To Middle School For Impeachment Trial

There are a lot of similarities between the Senate and middle school. The inhabitants of both sit at small, cramped desks; both have a heightened sense of self-importance; and both aren’t afraid to bend (or break) the rules if they think they can get away with it.

Case in point: During the Senate impeachment trial of President Trump, senators are supposed to adhere to a rather strict set of rules meant to keep the decorum of “the world’s greatest deliberative body” intact while allowing the proceedings on the floor to run smoothly. The rules, most of which don’t apply when the Senate is in normal session, require senators to remain seated and silent during the trial. Electronic devices, including cell phones, laptops and tablets, are prohibited inside the chamber. And senators are not allowed to eat or drink anything but water when the trial is in session. The one exception is milk (yes, milk). Continue reading “Senate Goes Back To Middle School For Impeachment Trial”

New Trade Deals Give Trump a Political Boost Amid Impeachment Turmoil

While impeachment dominated the headlines this week, there was also plenty of big news on the trade front, most notably the long-awaited signing of the Trump administration’s “phase one” trade deal with China.

So what’s in the deal? Plenty of ink has been spilled about China’s commitment to purchase an additional $200 billion of U.S. goods and services over the next two years. For reference, U.S. exports to China totaled $185 billion in 2017, the baseline year, meaning that they would have to increase a whopping 54% in 2020 to keep pace.

Continue reading “New Trade Deals Give Trump a Political Boost Amid Impeachment Turmoil”

What To Expect From The Looming Senate Impeachment Trial

The impeachment of President Trump is about to enter a new, historic phase. Beginning next week, a president will be forced to defend himself at an impeachment trial for only the third time in U.S. history.

After Democrats initiated impeachment in the House, it’s now the Republicans’ turn in the Senate. Barring some extraordinary new evidence or developments, Trump is almost certain to be acquitted by the GOP-run upper chamber. But that doesn’t mean the trial won’t be filled with drama and potentially damaging consequences for one party or the other, or both. Continue reading “What To Expect From The Looming Senate Impeachment Trial”

Congress, The Big Tent Circus

The two “I” words completely dominated Capitol Hill this week – Iran and impeachment. And in typical congressional fashion, lawmakers have no clear path or consensus for dealing with either. So just when you thought the three-ring circus that is Congress couldn’t get any crazier, more confusing or more conflicting, it just did. If the first week of the new year is any indication of how the rest of 2020 will go in Washington, buckle up.

Let’s take Iran first. President Trump’s decision to kill Iranian Gen. Qassem Soleimani via drone strike near Baghdad sparked intense debate in Congress. No tears were shed on Capitol Hill over the slaying of Iran’s top military commander, as Soleimani was responsible for the deaths of hundreds of Americans. But many in Congress – mostly Democrats but also a handful of Republicans – are troubled by the president’s penchant for carrying out military actions without their OK, or even their consultation. Trump bypassed longstanding protocol when he launched the attack without first giving Congress a heads-up, adding to many lawmakers’ frustrations that the White House is usurping legislative branch authority. Continue reading “Congress, The Big Tent Circus”