Commodity Research Group (CRG) is an independent research consultancy specializing in base and precious metals, as well energy products. The Group provides research and general price analysis for these markets, along with advice to companies seeking to construct hedging strategies.
In this podcast, oil market experts Andrew Lebow and Jim Colburn discuss key fundamental forces driving oil prices in both the futures and options markets.
About Your Hosts
Andrew Lebow has been involved in the energy derivative area since 1980. He began his career with Shearson Lehman Brothers where he worked in the initial formulation and marketing of the NYMEX WTI crude contract in 1983 as well as the NYMEX gasoline contract in 1985.
Mr. Lebow has appeared before the State Government of Alaska as well as the State Department of Defense to discuss hedging techniques. Mr. Lebow is also well known as a market analyst and is quoted frequently in the financial press. He has appeared on television on CNBC, NBC, CNN, CBS, and PBS. Mr. Lebow holds a BA from Lafayette College and an MBA from the Kellogg School of Management at Northwestern University
Jim Colburn is a futures and options professional with 30 years of wide ranging experience in commodity markets. For much of his career, at Man Financial (1989-2011) and Jefferies LLC (2012-2013), Mr. Colburn worked with major integrated oil companies, hedge funds, pension funds and other entities to develop market hedging and trading strategies.
He has conducted trading, hedging and risk management workshops in energy markets worldwide.
Mr. Colburn is a published author on options trading, hedging, market making and risk management. In 1986, while at the New York Mercantile Exchange, Mr. Colburn helped develop new markets in energy option contracts by educating the oil industry, banks, floor traders and brokers, worldwide.
Good morning. This is Jim Colburn of Commodity Research Group. I’m with Andy Lebow also of commodity research group and we’re here to talk about energy markets to learn more about us. You can check out our website, commodityresearchgroup.com where we post our podcast and our blog.
We would like to thank our friends at EKT interactive oil and gas training for hosting this podcast. Check out their newsletters, podcast and learning firstname.lastname@example.org.
This podcast should be construed as market commentary, merely observing economic, political, and market conditions and has not attended to refer or to endorse any particular trading system, strategy or recommendation. We’re not responsible for any trading decisions taken by anyone, especially those not intended to listen. Information is not guaranteed to be accurate. This is not an offer to buy or sell any derivative. Today is April 11th, and Andy, uh, do you want to talk about you? You’re now doing a podcast once a week, right?
We are Jim. We’re doing weekly podcasts and of course this monthly podcast. And we’re also sprinkling it in with some specials. If anybody wants to, feel free to get ahold of me email@example.com.
A Resilience of Demand
Let’s get right into this. I was looking at the IEA a summary this morning and they mentioned, they use the phrase a resilience of demand. Why don’t you, why don’t we start off there? There’s been a worry of a global slowdown and decline in demand. What’s, what’s your take on that?
Well, there’s been persistent or are you about the global slogged down and the market?
The oil markets have had a lot of hand wringing over the last, uh, four to five months about, about the slow down out away have, we just haven’t yet seen it in the, uh, in these consumption numbers. The Chinese numbers, the Indian numbers have come in a pretty strong us numbers. We’re, we’re good again in the first quarter relative to a very high baseline last year.
And the, and the three d agencies, which all release the reports, the suite, the EIA, IEA, and OPEC made no changes really on their, uh, on their demand forecast. Uh, however, the IEA today did warn that demand could slow down. And one area where it, where it looks like it’s, a trailing is in Europe, which is really not all that surprising, but you know, for fear about the demand really being crushed, it hasn’t taken place yet.
So the IMF has a shaved I think it was like two tenths off there to 2019 GDP numbers plus two plus 3.3. I think they see Turkey, Argentina, other things taking it down. And um, but the second half of the year, I think they have it stored of moving up. Again, I wouldn’t call it accelerating, but they have a 3.6% growth for next year. And so you’re not changing your an and prices are higher, so you’re not changing.
Prices are higher. I think we did shave ours by about a hundred thousand a couple of months ago. And I think that’s about right. I, I think demand is, you know, maybe this a hundred thousand, 100,000 loss face based on those particular numbers. But, um, you know, again, uh, the actual disappearance numbers are yet to support that. But, uh, I think down a hundred thousands probably, you know, growth of, of we were at like 1.4 and, you know, we went down to 1.3 We’re still at, we’re still looking at a pretty healthy growth for next year. Right. Which shot for 20 for 2019 2019. Yes.
OPEC and Global Oil Supply
And so let’s, why don’t we just slip right into supply, which has always a difficult, but, um, let’s, let’s talk about OPEC. I mean, they, they successfully cuts barrels off the market. We’re seeing the market react to that. Well, let’s, why don’t you talk about where OPEC is right now.
They have, uh, successfully through, um, the Saudis reducing productions by a million barrels a day and a, of course, the, the sanctions regime place on the Iran and Venezuela. Well, uh, uh, OPEC has reduced production by a over 2 million barrels a day from, uh, it’s October baseline numbers. Uh, the last OPEC report, which is important because that’s what, you know, the ministers tend to look at. Uh, the, the report which came out yesterday had them down to 30 million barrels a day, 30.02 based on the secondary sources.
They had been as well it down to a seven 50. I think the BIA had him at eight 50 to 900. So, so OPEC has, um, voluntarily and involuntarily taken a lot of barrels off the market and, uh, at 30 million barrels a day, uh, as the IEA pointed out, um, you know, we’re, we’re drawing global inventories and, uh, if, if the call on OPEC crude, if you look at the three, you know, you look at the three agencies, the call on OPEC crude in the second and third quarter, if you average, that average is like 30 and a half million barrels a day gym. So, you know, we’ve got a shortfall in the, we’ve got a shortfall in the market and you know, mark, it’s reflecting that it, it, it’s uh, and it’s rally here.
Right. And we see that in, in some of the, uh, flow. Let’s you, you seen the, the, uh, hedge funds, the fund fund business come in and they’re back a long again. Um, why don’t, why don’t you comment on what we’re seeing there?
Yeah, they’re back. They’re back long, but they’re, they’re well below, uh, what their capacity had been, uh, earlier, you know, late last year. Right now, uh, Wti is net long, about 250. Breadth isn’t net long, about 350, uh, which is say seven to one in eight to one, uh, launch the short at one point. The, those have been 20 to one and the, the net length has been a much higher than that. So there’s still a lot, there’s still a lot of capacity. I mean, the gross length has been over 500 for Wti, I believe it’s the, a is the right number right now it’s only 300. So Jim, there’s a lot of capacity for, for Lawrence the good element to this market. Yeah, I agree with you.
I’m not sure it’s as much capacity as it was last year. I mean people got really long. I mean we saw it in a and the hundred dollars calls. Um, and you know, I’ve been talking about how little volume we’ve been seeing in options girl. And if you look at, uh, if you look at March, which we traded under a hundred thousand contracts a day, whereas in November it was like 200 7,270 may have been a record, but, um, more recently in April we had 200,000 lot day. And um, when you looked at the calls and puts the call, open interest was zero, no change. And the put open interest was up by almost, uh, you know, uh, 20, uh, 20,000, you know, is it almost 20,000 lots? So, so basically it was a sharp up move. This was two days, a couple of days ago, sharp move in price. And yet it was a sort of a net zero open interest call.
And a plus open interest on a put, which, you know, without inter interviewing every single trader, you don’t know where the motivation, but it looks like a market, an option market that was actually selling into that, into that rally as opposed to say last year when you’d see all this, you know, volume on the call side would be increasing open interest. So it was a little different look to it. And like I said, 200,000 contracts was a, was a big volume day compared to what we’ve been seeing. Uh, you know, all year long. So, so going forward, OPEC changed their, their date for their next meeting. I want you to talk about what,
what you think’s going on there. Well, they, they wanted to get some more clarity on the, on the sanctions and they wanted to get obviously more clarity on law, on the price. Uh, the sign, the waiver decision by the administration, which is due by the, actually it’s through in the next, the next couple of weeks. The Trump administration of course had had granted waivers to some of the buyers of a Iranian crude.
Iran had been exporting around 2.6 million barrels a day of crude and condensate and, uh, that’s been cut to about 1.1, 1.2 million barrels a day of, of uh, crude and condensate. The market I think is expecting the administration to tighten it up. But you know, the administration has talked about it going to zero, uh, which I don’t, you know, that’ll never, I probably won’t go to zero, but you know, they watch, uh, you know, that they’re obviously watching, watching the market.
And I think that what’s going to happen is they’ll, they’ll try to tighten up the waivers somewhat, uh, to reduce Iranian exports. Maybe buy another hundred to 200,000 barrels a day to get it under a million. But, um, you know, the now is clearly not the time for them to go, to try to not give any waivers whatsoever, you know, and, and, and move it closer to a, to zero, because I don’t think they’re going to get any cooperation from the Saudis to replace those.
I think they will. I mean, they, they, they did last, you know, they did last year. Right. And it blew up in the Saudis face. So I, you know, I don’t see that. Yeah. There doesn’t seem to be a coordination between, uh, um, are this administration’s, uh, move on Iran versus a, what OPEC would a Saudis are going to do with they obviously, uh, the Saudis felt that, uh, these, the waivers, we’re going to be a lot less than than they actually were, or maybe zero.
I think the Saudi definitely, I think that the Saudis were expecting it to be, you know, that the exports will be much lower because there wouldn’t be, you know, there wouldn’t be waivers. Um, you know, that that forced them to reduce to engineer along with the Russians, you know, the, this whole a production deal that they did and uh, you know, in the fourth quarter of last year. And, um, you know, right now I think that they’re pretty, you know, I think one thing, they’re happy with the price. They probably would want the price a little higher. You know, they, they probably would love it to be 75 to $80 brand. Uh, you know, I think that would be it. That would be, they’re real, they’re real sweet spot. But you know, I also, they don’t want to see it get much. I don’t think they want to see it much higher because they recognize, you know, that’s a boom for the, for the u s a u s producers and the, you know, this is going to be market share.
You know, it could loosely, they could lose more market share and so they certainly don’t mind. Right. You know, I do think however, that if there were barrels loss, you know, if their barrels loss from Libya, you know, that the Saudis would be, would be willing to make to make those feral soft. But I, I don’t think they’re willing to make up, you know, anything else for Iran. Right. Which brings us to the US response. Um, what wha wha you talked about us production. We heard, uh, in a, uh, wonderful, uh, conference yesterday that put it on my Columbia University. We heard some interesting production numbers from some of the panel.
Why don’t you just summarize what you know, what you think and what, what you’re hearing that I have to say. That was, it was a great conference, uh, on a lot of levels. Um, and uh, you know, Jason Board off that, uh, you know, Columbia does, does such a great, the it just the way he’s just doing such a great job, but the, Jason, if you’re listening and congratulations on, uh, you know, tremendous true, uh, conference and they had one superstar guests after another and it was, it was on the record, so I’m not telling you anything out of school, but they had, um, Scott Sheffield from pioneer who of course, uh, you know, I think known as Mister Permian or the king of the Permian, uh, as, as most producers.
Jim, yes. How optimistic was he? I mean, he was talking about us production, uh, going to 17 million barrels a day. Yes.
Permian going from 4 million, 4.2 million barrels a day. The 8 million barrels a bay, as you say. And he didn’t say when, he didn’t say when. No, but he definitely is definitely a optimistic, as many, uh, many producers. He brought up a lot of, a lot of great points. As you know, he’s talking about the cost efficiencies, continuing to continuing to improve the technology, you know, continuing to, uh, improve and at any, he also mentioned the, all the drilled but uncompleted wells that he could see getting, putting it in, putting into action as, as, uh, as, as prices move, move higher.
I don’t think he said, I don’t think he said he was looking, I mean, last year of the Permian was up almost a million barrels a day. I’m not sure. He said this year it will be quite as high. No, I don’t think I mentioned a number, but he did seem to indicate there was enough pipeline capacity for the, uh, uh, for crude oil. It’s got natural gas obviously is a big, is a big problem. They have negative, negative, he said sit natural gasses free. I thought it was a even negative. Yeah. So I was even freer than free.
Yeah. Wow. How basis I think was, uh, what was negative and that, you know, that’s, that’s clearly a big problem that, uh, they, uh, you know, I think are having a hard time, a hard time solving. He also said a lot of the growth would, would have to be exported. A lot of the u s growth would have to, would have to be export it,
which is probably right. Right. Yeah. I think, um, if you get a chance check out that Columbia University energy, they sh they stream. Um, they were, they were filming it and they’ll put it up on their website at some points worth. The whole thing is worth it if you, if you can get the time to do it when I have thoroughly enjoyed it from beginning to end. Okay. So, uh, going into, let’s, let’s talk about, um, I think gasoline is also, you know, kind of eyeopening in its move higher. I mean it’s, it’s coming from a low level that I’m looking at the cracks, but um, made a nice move.
Gasoline and Product Demand
What’s a, what’s going on with the gasoline?
Yes. Is a real, uh, it’s been a real eye opener. Um, you know, we had, we had been saying, uh, over the last couple of, last couple of months in, in these podcasts on the weekly podcast where we discuss the, uh, Eias we’ve been saying, hey, you know what, gasoline is looking is looking better and better. In January. It looked like it really looked like death. I mean, it was, it was awful. We were in a bit, we were in a tremendous, uh, surplus refinery. Margins were brutal. I mean, just brutal.
The gasoline cracks where were negative. And, um, there were refiners that went into turnaround and a, they haven’t really been able to get out of turnarounds. The, there’ve been, uh, one issue after another. So refinery runs and gasoline production has been, um, really too low. Uh, and as a result, we’ve tried to gasoline nicely here, uh, to the point where if you look at day’s supply, uh, currently, uh, we’re at 24 day at 24 and a half days supply versus the four year average of 25.7.
So credibly, uh, gasoline is not from a big surplus in two, uh, looking a lot, uh, looking a lot tighter. Uh, of course things are gonna Change as refiners do get out of turnaround, you know what I’m saying, to finally give back. Uh, but it’s taking her a really long time. As a matter of fact, and mark are run level is about 700,000 barrels a day below last year. You know, crude runs both pad to an, uh, an impaired three. You know, things will change as it is may and June is that as they get up to full capacity. But the good news is that now rather than gasoline look in going into the season in a, in a big surplus, it’s going into the season. You know, it’s not tight, but actually it might be because, you know, there’s pretty good backwardation and all and all the physical market.
So I guess, I guess, yeah, we can get, we can even call it gasoline. We can go call gasoline tight. And it’s really helped the, a refinery margins, you know, just looking at pad three refinery margins are right now they’re running in just in the last month there. They were up $4 a barrel in the, uh, in the Gulf coast. Uh, and they’re, you know, they’re pretty good globally, globally as well. So that, that’s been a real, uh, that’s been a real surprise. Um, and certainly, you know, you’d have to say it, it’s bullish for now and gasoline consumption is holding up. I mean it’s good.
Yeah. I guess Lincoln such, it’s holding up, although, and this is something that prices, because gasoline prices of 50 cents a gallon, just the national pump price just since February. So, um, and, and that certainly is a number that pays very careful attention to what I’m saying. You know, they certainly don’t want to see it all that much higher.
What, let’s move right into a diesel diesel while gas cracks are going up. Diesels remained pretty much sideways. A diesel cracks came off pretty hard. Um, because the cracks have been so, so high that the diesel production, you know, diesel production has been, you know, yields have gone, gone to diesel and gasoline that’s going to change someone now with these gas France coming, coming back, diesels still is, is at least in the u s uh, we’re looking at 30 days supply versus a four year average of 36 and a half.
And then days supply of forces, a handy number that a lot of analysts use. It’s a stock’s divided by a demand, you know, that it’s a key number. I guess Jim. It, it’s sort of like when some bond replacement for, for, for baseball or uh, what, what is it in basketball? Pe are efficiency something.
Yeah, yeah. Something like that. So you take one number as it gives you a, Lisa, you at least an idea. A diesel is, you know, it’s been tight for awhile, you know, clearly, uh, the big thing coming up, and we will be talking a lot about this in a, I think in May and June is the Imo 2020. There’s a change in the, um, this is a change in the ship and the bunkers facts, which is going to require a lower sulfur marine fuels.
Um, as of January 1st, 2020, it’s a big, big deal. There’s a lot of changes, a lot of change and refinery configuration and what the demand is going to be for certain products. Clearly diesel demand as it is going is going to increase at the expense of a high sulfur fuel oil. And everybody is trying to figure out how much, what to do and how to play it and how to play it.
You know, it doesn’t, I think, I, I don’t really looking at where, you know, where these diesel cracks are. You know, the January, 2020 cracks, you know, the, the route where they were last year, more or less, you know, within a few dollars. So it doesn’t look like, you know, I know people are trying to figure out what, you know, what the play is. It’s not, it’s not so certain that, that, you know, they’re putting it on, just snap right in, in, uh, there’s so many things that could happen. I guess if you want to buy a calls outright might be a play, but then you have this, um, you know, you have OPEC policy, you have, uh, the, the, the world could be not growing or slowing down by then. It’s just, there’s so many factors that could change the absolute price of diesel even with this thing looming in the background.
Um, I guess as you say, the best play would be a crack, crack, crack a spread, you know, backwards. It’s not even that factory dated. So, you know, I wouldn’t do an outright, but you know, there’s probably going to be some opportunities that the question is you have to really figure it out. You know, there’s, you know, there’s going to be a lot of blending going on. You know, it’s not like, oh, demand for diesels when to go up by, you know, x hundred thousand barrels a day. Maybe, you know, maybe there’ll be enough diesel, the meet it, you know, or maybe you won’t go up that much.
Yeah. It’s just a lot of, there’s a lot of moving parts and you know, I think as you know, so often happens what the market thinks is going to happen. Does it? Yeah. I was just thinking the, um, when you look at the over on there for the, uh, WTI Texas tech game, it was like an all time low and the game went over time, right. It’s conventional, conventional wisdom is you always want to look at the play, you know, against that I guess. Um, but it’s, it’s the main thing is we’re not seeing a lot of positions being taken yet out in that space.
Yeah. I think that’s, I’m sure people are beginning to build some base load positions, but you know, I don’t, may still be too early in the, you know, there’s also the uncertainty over, uh, you know, the, there are a ship owners are putting in what’s known as a scrubbers to burn a high sulfur fuel oil. You know, some of the ports of saying that’s not going to be good. You know, we’re not, we’re not going to accept that. I mean, there’s a lot of stuff flying around.
Yeah, somebody told me a story where, um, in in 2020, if you a ship captain, then you come in to Singapore with, uh, you know, off the burning off spec diesel, uh, you, you’re going to get two years in jail. And, um, I, you know, I don’t, I haven’t been able to track down the story, but um, you know, God forbid if the person’s also chewing gum.
Yeah. You know, the, uh, I don’t think you got, the fines are pretty heavy, right. All the fines are going to be pretty heavy. I don’t really know about,
I’m not trying to make light. It is a serious, uh, uh, policy. Um, and uh, we just don’t, again, we just don’t see people putting positions on back there yet in a big way. Right. Before we talk about prices going forward, I just, I just, uh, wanted to talk about the options world. Um, you know, the, we had a 50 plus 50% vall coming into this year. A front month is now around 22. That would be, may, may goes off the board, 16 April. So it’s kind of a, it’s gone before all the fireworks, uh, take place.
Um, you know, with the Iranian sanctions, uh, should, should come out early May and then there’s a ministerial, sorry, a monitoring meeting in May, in the full meeting, June 25th. So when you, when you look at this option curve, it’s kind of flat. So you have 21, 22% in May and then December is 23 and a half.
Oil Options and Implied Volatility
Typically it’s, it’s backward dated because of the, you know, the volatility is on the front end, not so much in the back. And then when you look at the actual or realized historical volatilities, the premiums of implied over historical continue to get greater as you go out. So in the front, implied vol is three points over historical vial, which is kind of a normal, a place to be. But when you get out to a June, it’s six a vowel points. Implied is over historical and you get out to December, it’s 11 points over historical. So, so it’s kind of, you know, the, the, the market is a okay to sell may options. But though be careful selling June, July, and out the December. Now as I mentioned in previous podcasts, we may have lost some option sellers last year. W you know, then that natural gas volatility and also the late, late move and crude.
So we may have lost some options, sellers for awhile made and that’s what’s going on there as well. But I just wanted to point that out. And we made, uh, in, uh, April 5th, we made a low of an implied Ville of owl in of eight to 18%. So, so the 22% we’re at now is bounced off off the lows and, um, we’ll be tracking that as we go into the, uh, into the, uh, into May. Um, okay, so what, what are you seeing, uh, this, this is a tough one, but what are you, where are you seeing, uh, let’s start with crude oil prices going forward. Say in the next month or so.
This is, yeah, as you say, this is a, this is a real, a real tough call here. You know? Right. Right now the market’s off off a dollar. Uh, there, there was a story that OPEC is, is looking at perhaps increasing production in the, uh, in the second half if prices, if prices move higher or loss of, of uh, Libyan barrels, you know, they’ll, they’ll look at the market in May with more information, uh, about the, uh, about the sanctions and then in June make a decision. You know what I, most of the, most of the chat coming out of the Saudis have been, they want it, they want to extend it, but again, you know, uh, maybe they’ll extend it with, with an option to increase the Russians. Definitely want to, uh, increase production or, uh, you know, us is going to be increasing production, increasing production as well.
I think the market has a little more, I think it does have some upside. I think that you look at the balances and at least for second quarter, you know, they still a pretty tight, uh, we’re, we’re not, isn’t like Venezuela is increased production all that much and there is a risk of, uh, of Libya losing barrels. And as we said, demand continues to be, uh, continues to be pretty strong. So, you know, I could see, um, we’re, we’re at 63 64 the second, you know, I think there’s a chance for the market to get up to maybe 67, 68 maybe on, uh, on, on a reach. Similarly bread to get into the mid to, uh, until the mid to the upper seventies. But, you know, that’s just based on the balances is that there’s still a lot of news, a lot of news, a lot of news ahead to get through.
So, uh, you know, it’s, it’s a pretty tricky market here in Japan. Of course, gasoline and diesel going forward. Any, any uh, comments on the price? I think in terms of cracks, I think gasoline cracks probably have a little bit more because these refiners are, are, you know, I think they have, at least on the front end, I think we’re fine. Arts have, you know, it’s still going to be Andy. We, uh, we just had a technical difficulty so maybe you can continue talking about that gas cracks go forward. I think that, um, there, there’s room on the upside still for gas grasp is it’s taking refiners. It’s still going to be a few more weeks till that till they get back to a near 17 million barrels a day. Uh, or, or ultimately they’re going to go up to 17.7 million barrels a day later in the later in the summer.
But in the meantime I taught, I think there’s a chance for those cracks ago high or similarly. I think diesel may have some diesel cracks, may have had some upside in the short term as well. And um, anything else you want to add to our monthly podcast before we wrap it up? No, I think, I think the market is a lot of, uh, as, as we try to talk about is a lot of moving parts, a lot of geopolitical moving parts between, uh, you know, the Saudis, Iranians, U s, Russia, Libya. Um, it’s, it’s a really interesting market and um, you know, obviously I think for both, you know, for the traders, the economists, the Geo, the file to follow the great game.
Okay. Thanks. Andy Lebow see you next month. We try to get this podcast out right around the time when the EIA puts out their monthly short term energy outlook. This is Jim Colburn, commodity research group.com. Check us out. We’re also on linkedin. You can check us out there as well. Andy Lebow, we’ll see you next month. Okay. Jim.