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The Billion Dollar Oil Hedge That May Never Happen

Remember August 1st? That’s when Trump announced new tariffs on China and oil took its biggest plunge in four years… and now the final week in August is gearing up to be even worse than that. Oil prices fell sharply at the end of the week after China announced on Friday that it will levy tariffs on US crude oil by the end of the year. Until now, China has targeted LNG for tariffs, but never crude. The market will be looking for a signal as to what this means for the demand picture, but its verdict won’t just be about strict near-term fundamentals. China doesn’t import the bulk of its crude from the US, while Saudi crude shipments to China have doubled over the past year. At the same time, the Fed’s Friday announcement could also impact oil markets.

The Oil Hedge That May Not Happen

Mexico’s billion-dollar oil hedge may not happen this year, a disappoint for Wall Street as the banks always battle to be on the profit side of this hedge. Volatile oil markets - the very thing that makes the hedge necessary for Mexico - are causing Mexico to reconsider is mega oil hedge that in 2015 netted the country more than $6 billion through the contracts it arranged with banks to sell its oil for a predetermined price that was much higher than the rate at the time of sale. While some progress was made in June in coming up with its formula for the hedge, it was still later in the year than usual. Mexico relies heavily on its wildly successful hedge for its revenues, and if it decides not to go through with the hedge this year it may have serious ramifications for the country.

In just three previous years of the hedge, Mexico raked in enough profit to fund more than a decade of oil hedges, which typically cost the country $1 billion. Last year, Mexico spent $1.23 billion to hedge against 2019 prices and protect revenues. That was a hedge at $55 a barrel.

These hedges, for which Mexico is famous, mean that creditors are generally willing to provide more favorable lending terms because they see part of the risk associated with oil prices has been transferred elsewhere through hedges. But it’s a tradeoff: There’s an upfront cost for the put options in this hedge even if no risk materializes. In other words, it’s diverting resources.

Tesla Should Give Up On Solar Panels

Tesla acquired SolarCity in 2016 for $2.6 billion, giving the EV pioneer a major player in the solar panel business. But things aren’t going so well today. This week, Walmart sued Tesla for “gross negligence” in relation to eight fires that have broken out when roof solar panels caught fire. Walmart hired SolarCity to install solar panels on the roofs of more than 240 stores. Now the retail giant says that those fires have caused millions of dollars in damage, and is claiming that Tesla failed to explain the fires, while the number of fires is “indicative of systemic, widespread failures by Tesla to meet the standard of care, as set forth in the governing contracts, as to the solar systems installed at Walmart’s stores”.

The lawsuit comes right at the moment that Tesla is in the middle of relaunching its solar business. It’s trying to get more customers by offering solar roofs for monthly rent, without long-term contracts or installation fees, for instance. The only catch to this deal is that if you opt out you have to pay a $1500 removal fee. The additional potential for fire that is now the biggest thing topping the solar mainstream news isn’t likely to encourage the volume of customers Tesla was hoping for in this case.

SolarCity growth volumes have hit record lows. In March, SolarCity announced it would close down most of its stores. SolarCity, by most accounts, was already dead at this point. The August relaunch was a last-ditch effort to save it. But then the Walmart lawsuit hit and every problem that everyone has had with Tesla’s acquisition of SolarCity since 2016 again rose to the surface. SolarCity hasn’t done much of anything for Tesla other than provide a major headache from the beginning—and it’s the energy storage business, not energy production, that represents Tesla’s avenue of growth in this segment. At this point, it’s best if Tesla sticks to EVs and energy storage solutions.

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