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, Andrew Lebow and Jim Colburn discuss the latest economic trends and supply and demand factors affecting oil prices.
About the Experts
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.
Speaker 1: (00:03)
Good morning. This is Jim Colburn commodity research group. I’m with Andy Lebow also of commodity research group and we are here to talk about energy markets along with Ed Meir. Andy and I founded commodity research group, which consults on various aspects of commodity markets. Check out our website commodity research group, that com where we post our monthly commodity reports, our daily metals reports, our blog and our podcast. We would also like to thank our friend Doug Stetzer of EKT interactive oil and gas training for hosting this podcast. You can check out his daily newsletter, podcast and learning firstname.lastname@example.org. Today is Tuesday, February 7th. Andy, there’s been a lot going on since our last podcast of about a month ago, so why don’t we start by getting us up to date on OPEC compliance and us a production response
Speaker 2: (01:10)
to that. Okay. Let’s first start with the OPEC compliance, which, uh, has actually been a strong, very strong, uh, it looks like in January that OPEC reduced their production by at least those who agreed to reduce production by 1.2 million barrels per day are pretty close to a million barrels a day. Our reductions, uh, that’s about an 80%, um, 80% number, which is frankly more than what we thought. Uh, I had, uh, we had thought that it would be something like a 0.7 or 0.8, but, uh, the Saudis reduced, uh, more than they said they would. And the Persian Gulf producers have a also are a right just about right on there, uh, right on their numbers. Uh, the producers who said that, that, that were not part of the deal probably increased their production by about a hundred thousand or 150,000, which means a net OPEC reduction of, um, that 850 to 900,000. Again, that’s about 200,000, uh, better than what, what we had thought. So I think by and large, uh, at least on the opex side, this a production deal has, uh, has really worked. I mean, they’re, they’re, uh, they’ve done a good job, uh, so far anyway. So, uh,
Speaker 1: (02:43)
Andy, we had, we had a pretty good price response out of the meeting back in late November, early December. But, um, when these, when these OPEC OPEC compliance numbers were coming out and I just felt like the market agreed with you and said, it’s better than we expected, but we really, we really didn’t get a strong, you know, follow through and price off of that. Would you, would you agree with that?
Speaker 2: (03:09)
Yeah, I would agree with that. I mean, prices did, did appreciate, uh, during, during the month of January, but, uh, you know, it, we’re still as good as these production cuts have been. Uh, we’re, we’re still fighting the same, uh, the same battle of, uh, of high inventories. Uh, the IEA had inventories are still at a 300 million barrel surplus. So, um, I, I think that’s one reason why the production, why price is probably didn’t move, uh, all that much higher. And, uh, you know, as we’re about to talk about it, it’s still gonna take some time to, uh, to draw these inventories and sec and getting to the next point. Jim, on us production response, um, we, US production, uh, has at least them looking at the weekly numbers, uh, has increased by, uh, about 150,000 barrels a day from the end of, uh, from the end of December. So, uh, you know, that’s, that’s a pretty big number to them and basically counterbalances, if you look at non OPEC of which Russia is a non OPEC producer, Russia did reduce its production by a hundred thousand barrels a day in January, but us production, uh, more than, uh, more than counterbalance that.
Speaker 1: (04:36)
And in today’s, um, EIA numbers, um, they, they updated their, their balance. You know, we’ve been talking about when is this market going to go into balance? And it, do you want to just talk about what, what their numbers should right
Speaker 2: (04:51)
today? Well they, uh, they’re showing the market moving into balance some time, a lot sooner that than they had, I mean their last, their last dia s t o uh, didn’t have us in balance all in in 2017. Uh, this one is showing, uh, a first half, maybe second half, a second half balance. So this, and they made some real benchmark revisions based on, some of it’s based on historical data, but, um, I think the IAA is finally on the right track because last month’s numbers really didn’t make sense. Uh, looking at the, looking at the supply and demand.
Speaker 1: (05:38)
So, so, um, just wanted to make a point on there. Their demand number, they’re looking for an increase in global demand of 1.6 next year. Is that that’s correct. Yeah, that’s correct. I you again, are you in line with that or you know,
Speaker 2: (05:51)
I think that’s too high. It’s too high. It’s too high. I think it’s going to be something like one, one two or a or 1.3 million barrels a day. I mean we’re off to a rough start here in the, in the u s and the a, the actually the January Chinese numbers were, uh, were soft. So I don’t think we’re going to, I don’t think, I think once 1.6 is way too optimistic. I think it’s going to be one to one three, which is more in line with OPEC and what the IEA is looking for.
Speaker 1: (06:25)
Excellent. Um, I want to basically we’re looking at today’s market and it’s coming off hard, so I thought it might be a good time just to talk about the, the net length that’s in this market by, uh, by uh, managed money. Do you want to just comment on that?
Speaker 2: (06:43)
Yeah, I think one of the real, uh, besides inventory length of, uh, as we met, as I mentioned, 300 million barrels. This also the speculative length, uh, which is an overhang. Uh, if you look at the net length of Wti and Brent combined of the speculators, it’s 850,000 contracts, which is 850 million barrels. So, and, and both of those are record. Um, Brant, the long to short is around 12 to one, an Nti. It’s, it’s like eight to one. What you really want to see. And that’s long too short. What you really want to see is something like three or four to one, you know, so we’re way, way too long. And, uh, that really is, is an overhang. And I suspect that a lot of today’s action is a, some long liquidation. Uh, and, and we’ll see what the open interest is. But, uh, the, um, speculative length is a, is much too much, much too long.
Speaker 1: (07:54)
Yeah. Just, it just seemed to get ahead of the, uh, the fundamentals by it and maybe not anticipating, like you said, a weak China demand. And, um, as we’ll get into it maybe a week, uh, uh, us a product demand as well. Right. But I just look at the structure of this. So we, we have, we have 850 million barrels of, of a, of length in the hands of a money managers. I mean, most of that’s on the front end, correct. Is he like the first few months out and then if they continue to be long, uh, they’d be rolling into the next month. So they’d be, they’d be selling the front month buying a deferred month. Right. And just by that sheer volume alone, I would expect that to continue to put pressure on the front month spread. Avi, obviously the, the funding oil fundamentals are most important, but, um, there’s this extra, a huge flow of, uh, of, of contracts that, uh, um, well I think
Speaker 2: (08:56)
will pressure the front end for a while going forward despite what the, what the fundamentals are. I think you’re right Jim. Uh, and you know, you throw in the fundamentals, um, because we’re, we’re about to, February is the peak us turnarounds and this year a turnaround are heavy. I mean, we’ll, we’ll, we’ll be one point, I think it’s 1.2 million barrels a day of February turnarounds. So you know, you’re naturally going to be building stocks during the month of February. So I think, Jim, I think you’re right on because we’ll be seeing this massive length, uh, running into, um, supply increases in, in the mid continent and in the Gulf coast as refiners go into turnarounds or maintenances. Um, so yeah, I think there’s real risk that the front end could get, could get hit a hit a little higher to hit a little harder. Interesting. Um, okay. Uh, why don’t we talk about, um, gasoline, a product demand manual.
Speaker 2: (10:05)
US gasoline seems to be a tale of two, uh, two pads. The tale two pads, that’s, that’s pretty good. Uh, and, uh, the guests lean has really been a major disappointment, um, because inventories have just spiked over the last three or four over the last three or four weeks, uh, rising something that 25 to 30 million barrels, uh, over over just the last four or five weeks. And we’re now at the point of 257 million barrels and a in inventory where we’re right near last year’s peak monthly peak of 261 million. And that serve to ruin the whole gasoline season. It took months to get out from under the, um, get out from under that type of overhang. And, uh, as Jim as you were saying, that overhang is in pad one where we’re, I think we’re at a record and pad three is a, is also probably higher than, uh, than it ought to be.
Speaker 2: (11:16)
Um, now one of the reasons why this has happened is that the January demand was way off trend. So I don’t, I don’t think the January demand or what was right. Um, and I think February we’ll catch up and the monthly swill revise all that. So I actually do think there’s a little more hope for this year as gasoline season then, uh, then what we saw last year. Um, but it’s definitely, uh, as a, as I said, really a disappointment. I had not thought that we would get anywhere near last year. Uh, last year. It’s bloated inventory numbers. Um, and why is demand soft? Part of it is probably in the, in the data, uh, but there probably is a little bit of a price response to high pump prices. Bond prices in January were 50 cents higher than, uh, than year ago numbers. So I’m sure that there’s some of that, but it shouldn’t be, it shouldn’t be as soft as it is. It’s like 400,000 barrels a day below last year. And as we know, uh, miles traveled is still on a, on the upswing. And, uh, the vehicle fleet efficiency doesn’t change all that much month to month.
Speaker 1: (12:33)
Yeah, it’s a, it’s interesting. I think the EIA described that it was, it was a 57%, uh, uh, decline decline in gasoline demand occurs seasonally, but this year it was a 50% larger decline than the five year average. Right. Demand, which is unbelievable. It is unbelievable. It’s why I don’t believe it. Well, I’m going to check Netflix and see if there’s any binge worthy shows that came out during that period. You know, Domino’s pizzas doing really well. Netflix is doing well. So maybe people were just saying, no, I’m staying indoors. And, and also the malls are getting killed. Nobody’s going to the malls anymore. But even with that 57% as it is just hard to believe.
Speaker 2: (13:21)
Yeah, I don’t, I don’t think it’s correct. I also think that the, um, the other thing that will happen is the Gulf coast is, is going to start draining, uh, because of export demand, export demand both to, well mostly to a, mostly to Latin America. Um, I think in February and may be into march, we’re going to break the million barrel a day mark, uh, a monthly average and uh, in, in February.
Speaker 1: (13:58)
And, um, that gas, we’re talking gasoline demand. Is that you think that’s due to a pickup in the economy in Latin America, South America, or is it more a refinery issues?
Speaker 2: (14:11)
It’s refinery issues. Mexico is still running probably, I think they’re now under 50% capacity, so that, so they’re taking a lot of gasoline and there are some other, uh, major refinery issues in, uh, in South America. So I don’t think it’s, I, you know, there is some pick the, certainly some pickup in gasoline demand from Latin America, but I think by and large, most of it is due to infrastructure problems.
Speaker 1: (14:41)
I don’t even want to bring up, we’ll talk about this later, but this a important tax is just going to mess up a major amount of a flow of, you know, mate, maybe the US refineries are, uh, become less competitive on a, on a world basis if they have to pay more for their inputs. But we’ll, we’ll, we’ll talk about, yeah. Do you want to talk about a distillate demand because there’s, we’re also, uh, want to say a wash, but there’s a lot of discipline around.
Speaker 2: (15:09)
Yeah, there is. And uh, again, uh, disappointment and in January has got to be in, in distillate demand. I mean, last year we had a warmer than normal January. Uh, it actually this year incredibly demand the temperatures in the northeast or probably two to three degrees warmer than last year. So I think that hurt the, uh, the dislet demand. I would expect that once we get out of season to slip demand will be, we’ll be pretty strong. Uh, mining and manufacturing is coming back and the economy is still still moving ahead. It’s still growing. Uh, so I, I think demand is going to pick up for, uh, for diesels as we move into the R. Dot. Basically, as we move out of season, and of course we still have February and March ahead of us, uh, but right now the longer term forecast a little bit warmer than normal. Now, the good news for diesel is that Europe had a, a much colder, much colder than normal December and into January.
Speaker 2: (16:21)
Um, and what we saw was the, the arbitrage, the heating oil to Gesso arbitrage collapsed, uh, with New York weakening relative to, uh, to Europe. So we’ll probably start seeing some decent export demand of diesel out of the, out of the Gulf coast and that’ll, that’ll help to, um, train the, a train the Gulf coast, uh, as well turnarounds. So I, I’m thinking products are going to be looking better as we head into a, as we head into march and April, US products should be looking better. And the other big, big factor that we haven’t talked about yet is that turnarounds, global turnarounds are massive this year, particularly Asian global turnarounds. I take in March and April are going to peak at something like three and a half to 4 million barrels a day. And that’s a million barrels a day, more than, uh, more than usual or more than last year. Uh, so, um, we have these big turnarounds. It’s going to tighten the, um, diesel and probably the gasoline balances globally and that certainly is going to help, uh, US product. Uh, so that, so that, that’s going to be a really big factor. I think products look, you know, they look horrendous right now, but I I you look out into March and April, I think they’re going to be a whole lot better.
Speaker 1: (17:44)
So this, uh, this sloppiness that we see early on could be contributing to the cell lost. Know we went to, again, we go back to this large speck position. Maybe we get an exaggerated wash out, but you don’t think it’s so you see short term a weakness, but as you go further out, you don’t see another, you know, big collapse in this market. You see it’s starting to pick up again.
Speaker 2: (18:10)
I don’t know. I think, I think it is going to, this is going to pick up now the gasoline numbers are also too long and in terms of the spec length and hated walls too long as well, so that that’s uh, certainly a, a bearish factor. But I don’t think, I think the products markets just based on fundamentals are going to start, uh, are going to start showing improvement and that certainly is going to help, um, help the crude market down down the road. Uh, but, uh, as we talk about balancing the market, you know, if we have these massive turnarounds in March and April, uh, it means that product stocks may draw, but crude stocks are probably going to build and there’s probably still going to be in that build. So we really have to be looking. I know we’ve been kicking this can down the road a long time. We really have to be looking something like April, May, June, um, probably made June before we really start seeing some serious stock draws. And we really started OACD. Um, inventory’s really, really start to draw heavily. Um, and then it will be just in time for the OPEC meeting on May 25th. Um, but you know, I think, I think may April, May, is, is, is when we’re going to really start the serious rebalance.
Speaker 1: (19:33)
So do you want to venture, uh, what, what’s your price outlook for that time period? Gonan let’s, let’s say going into May, can you kind of, would it,
Speaker 2: (19:45)
I think the market’s going to, now we’ve got some liquidation, you know, the market’s weaker than I really thought it was going to be, um, for the, for right now. And that’s because of some of the geopolitical developments, which I’m sure we’ll talk about Jim. Uh, but I think that as we, as we head into the second quarter, uh, we could see prices up into the, into the near 60. I could, I could see prices near coming back maybe 50th year to Wti, 55 57 Brent near near 60. I think the market could hold together. And then you start that seasonal rally, right? Right. You start little rally in the second quarter and it will be rallying for good reasons. So, you know, let’s get rid of some of this length, let the market reset and um, you know, the, in terms of the good things going on, um, I think, you know, the sole pet compliances is, this is obviously a supportive development.
Speaker 1: (20:51)
Right? Right. And then eventually you will get into their summer and maybe, uh, maybe, uh, the Saudis will have a place to it that’ll help their demand as well.
Speaker 2: (21:02)
Right. And we don’t know what, you know, know it’s second half is going to look like exactly what though. What really is just looking at the fucking, you gotta just do the first half because we have no idea what OPEC’s going to do in the second half.
Speaker 1: (21:16)
Right. Well, it’s, it’s interesting you bring up that that’s $60 level. I mean, if you look at some of the, uh, I was going to wait til later, but I’ll bring it up now. Um, the, the, uh, if you take the elbow options, the WTI options, the, the big open interest happens to be on the $60 calls in June and December. So, the, so the big one is December, like 47,000, 500 and June has 40, 42,000. So those are pretty good numbers. I think that $60 number is, you know, if you’re a producer, you sell it. If you’re a speculator, maybe you buy it. I think, you know, I, I think that’s what what’s been going, I think if you took the participants and looked at who was on the buy side, who was on the sell side, I think that’s probably what you might, how it might break out a net net. And, um, so we’ll keep an eye on those and see if we can get up there and, uh, by, by the time that June option goes off the board, um, geopolitical risks. Let’s t let’s talk about that. Uh, I mean, uh, ran it, it sounded like for a couple of days there people were just talking about it ran.
Speaker 2: (22:25)
Yeah. Uh, and you had some people looking at like the DCE 80 calls and the DCE hundred calls. Uh, you know, a lot of, I think there are a lot of quoting on, on those as, uh, as I, uh, as I understand that, um, and Irfan is a big geopolitical risk out. Like last week we put around on notice, whatever that means. Uh, but, uh, and we also impose some more sanctions. Uh, clearly the big issue is going to be the, the nuclear deal and, uh, where that goes. I think for now it looks like, uh, the, the, uh, administrative, the new administration, uh, doesn’t want to, um, doesn’t want to renege on the deal, uh, by any, by any means yet. I think what they’d love is for Rant, a rant to renege on the deal, but the European or European allies certainly have been in favor of the, uh, of the nuclear deal.
Speaker 2: (23:29)
But, you know, I don’t think that that deal is sacrosanct by any means. And, uh, you know, that that’s going to be a, uh, you know, I, I, I think that’s going to be in play from time to time over the next few months and we’ll see if this, hopefully there’s no military action, but as, as Jim miss you and I know 40% of, uh, of crude flows through the Straits of Hormuz. So that’s a, uh, that’s a major choke point. Oh yeah. You know, we’ll, we’ll see the, you know, but, but that’s clearly a, a, a major geopolitical, geopolitical flashpoint. The other thing to look at is Libya. Uh, because right now Libya is an important swing producer and a certain extent to a certain extent, they’re not part of the, they’re not part of the deal. They’re an OPEC producer, not part of the deal. And, uh, right now they’re on, the exports are on the way up.
Speaker 2: (24:28)
Um, they’re probably, they say they want to get up to over 900,000 barrels a day this year from three or four last year. Uh, but you know, that could go either that, that certainly can go either way, exports or production, production production. But they are exporting now. Most that’s going exports anyway cause the refineries are all screwed up. Um, so around 700,000 now they’re there. Yeah, there’s 690. Yeah, there are around 700 and they want to go up to 900 and then their max output was around one, two, something like that. Or is it at the post? Uh, post Kadafi I think it was a post Kadafi yeah, I think that’s right. One, two, maybe they got a one six one month, but uh, you know, I think one two is, yeah. So, so that’s another, uh, obviously another, another um, producer to watch as as Nigeria, Nigeria is Nigeria is production may go down in February because they have a big maintenance coming up on the Bongo fields.
Speaker 2: (25:34)
So you know, their, their production actually could go down. I think OPEC production is going to make a down slightly in February. Well at least that one scheduled that scheduled. Right. And in anything, um, you know, one thing that we, we really never talked about as Venezuela. We is it just kind of Midland, I mean, they, they’re going to keep producing where they, are they going to decline? What do you think there said, I think we’re going to see further declines this year. Uh, you know, I think that they’re probably going to go down in the a hundred to 200. They’re, they’re obviously trying to, uh, they’ve got some programs in place where they’re trying to increase production and that they’ve, uh, but they failed so far. You know, the, the, they’ve, uh, they fail, you know, the country as Jim, both of us know, the country’s been on edge for a, at least economically for a years now. Yeah. It’s such a shame. It really is. But I think this year they’re, they’re set to a, their sets to decline plot. That’s another, that certainly is another geo of political flashpoint.
Speaker 1: (26:43)
Yeah. I, I just remembered a few years ago, we were talking about flash points around the world and somebody came up with Venezuela. We all kind of snapped their necks is and what, you know, cause you free, you know, it’s just, you forget about country like that. Um, do you want to say anything about the potential import tax?
Speaker 2: (27:04)
Well, let’s talk about the potential import tax. We’ll talk a little about it. We talked about in our last podcast, but, uh, obviously this border adjustment tax, uh, some may, it could, could be a really major development in the, in these markets for the oil markets and actually for the global markets. Um,
Speaker 3: (27:31)
Speaker 2: (27:33)
basically what I’ll basically, um,
Speaker 3: (27:37)
Speaker 2: (27:39)
basically it would be about a 20% difference, um, for imports would be 20% higher than, uh, than exports, which should theoretically, uh, raise the price of Wti by 20% relative to a relative to brand. Um, again, that’s all theory. I don’t believe in that. I don’t believe the theory is, is correct. But, um,
Speaker 1: (28:12)
yeah, it’s, it’s, there’s also some economists are saying you’ll see an equal, um, move in the dollar. Right, right. So, but that doesn’t affect the relative value of, uh, of say something like Brent and Wti cause you’re, you’re actually slapping a tax on imported.
Speaker 2: (28:33)
Yeah. You’re slapping a tax on imported and not on, uh, on export, not an export of goods. So, um, yeah,
Speaker 1: (28:42)
I mean I was saying before, I thought maybe you could see something like there’s some really heavy crude oil from Venezuela and from Canada get imported more because the tax would be lower and then have the blenders blend it up too. I Dunno. Wti Quality, something you’d see some weird things going on with the trading. And, and I think you would also say to some of those east coast Canadian refiners, you know, you, you’re going to be more competitive than us, our refinery, US refiners, talking about, uh, in Latin America and South America. So it’s so it gets, it gets back to what’s, what’s the probability that something like that gets passed. And I just, I just think there’s going to be so much opposition, you know, that, that, uh, we’re gonna, we’re gonna hear a tweet of something like, oh, that’s too complicated. Right? Which we’ve already heard, which you’ve already heard yet. I think that right now the banks are putting like
Speaker 2: (29:42)
20 to 30% chance that this gets passed. But I think as, as it becomes more publicized and people start talking about how gasoline prices could go up 20 or 30 cents a gallon, that that’s a real, that’s a real tough issue for a lot of, uh, you know, a lot of legislators, it’s an economy killer. Yeah. It’s an economy killer. I don’t think it would be exactly that though. You know, at first of all, if TFW, if us crudes are suddenly $10 more expensive than any anywhere else, we’re not going to export. No one’s going to want our, our barrels and exports are 700, so that could go to 200. Uh, and certainly there’ll be a producer response. So I don’t think it will be, you know, maybe, maybe tio go two or $3 over brand. But, uh, I don’t think, and maybe initially it will spike before it comes off, but, uh, you know that at $10 is tough number.
Speaker 1: (30:46)
And then who knows who has the president’s sphere, but there is a, there is an ex Exxon employee in, in the cabinet. So maybe if, I don’t know if he’s going to weigh in on energy or tax policy, but he certainly, uh, he certainly could.
Speaker 2: (31:03)
Right. And Jim is, is getting back to this border adjustment tax. There’s certainly has been a big play in the, in the options which we talked about last podcast for it. I think it’s even gotten bigger. Yeah. Just, uh, just date
Speaker 1: (31:16)
on that. Um, we talked about the DCE 18 is count 2018 flat call on Wti Brent. So that means if you buy this thing, um, you’re expecting Wti to trade overprint and that’s basically what, uh, what the import tax would, uh, would force the happen or pushing in that direction and in potentially a big way. And so there we see that right now there’s about 50,000 contracts open on that one strike, which makes it, uh, by my, my eyeballing the largest option on the exchange, um, in, in oil. And, and that’s, that’s unheard of. It’s a, it’s a spread option. The big strikes tend to be the WTI options that, that trade the price outright. This is a relative value of WTI versus Brent, so that it’s just incredible to see that kind of volume come in on a, on a trade like that. And now it’s, um, it’s, it’s created its own, uh, uh, sort of trading going on because if you’re, if you’re short that call and that spread starts moving up, you, you, if you’re a market maker, you have to take, uh, uh, some protection against that.
Speaker 1: (32:40)
So you might actually, uh, by the spread as it starts moving towards your strikes. So basically creates its own dynamic. And I, and, and it seems to have quieted down. Um, but those, uh, those contracts aren’t going away for a while. Those, they will still be there. Um, but since you opened up the door for options, I’ll just make a couple of comments. It really, since the end of the, uh, of November, early December after, after the OPEC meeting, uh, this option market has gotten very quiet. Um, implied volatility, um, is around 27, 28% is probably a little higher today. Uh, and this is the lowest level since before the OPEC meeting. And I’m talking about the OPEC meeting in 2014. Okay. So that’s, that’s the one before we, uh, you know, that, uh, w w it was a disaster of a meeting and, and, um, just before that we were, we were around 27 actually, actually it’s about a month earlier in that month, we were wrapped right around these levels.
Speaker 1: (33:45)
So spent a while that we’ve been down this hello. And you know, like you said, if you look at what the, uh, the price level is pretty close to where we were after the OPEC meeting. So we really, we’ve been shopping around and there’s been a lot of talk, but we are pretty much waiting for the next, uh, you know, event to come up and we were in the same place price wise. So it makes a lot of sense that viles, uh, have come in. And if we look at the structure, we still see the, uh, sort of the, the 45 and $50 puts have the most open interest going out through the year. And on the call side, it’s the 55 $60 calls. And if you, if you’re a producer, you can see, uh, you probably wouldn’t mind selling a 55 or $60 a call.
Speaker 1: (34:32)
We’d love to sell your oil up there. Uh, it w and you want to buy a 50, 45, 45th, $45 put to protect if, um, if things go the other way. And we mentioned the, um, the spread options, uh, already, um, just to re repeat the, uh, the minus 50 put a from March to June has been active. The minus 25 put a from July two d, so this is 2017 is, has the most open interest and the flat call from March [inaudible] 17 is, is the most active in that. And I make sense figure Maya’s 50 cents is where storage becomes a profitable and flat calls when we flip from contango to backwardation. So there’s a lot of, um, a lot of interest in, in, in those particular points. Um, what else? Uh, the only thing I’d say is, you know, you really have to be careful. Um, I mentioned, um, there’s, there was a piece in one of my favorite blogs, a marginal revolution on the Vix, and they’ve talked about how the vix is so low, uh, despite, um, the new president doing all this, uh, you know, tweeting and, and, uh, all the activity in, in, in, in the new White House, trying to figure it out in meanwhile the vix is that at a very low levels.
Speaker 1: (35:56)
And I, I kinda, I kind of, I actually commented on that blog and I said, you know, just consider going back to 2014 when implied volatility in June of that year was at record low levels. It got down below 13%. And, and when I say record, I’m going back to, uh, 1986 went options start trading on the exchange. So it’s a long time. And then later that year, volatility was up around 50%. So you can’t, you know, the, these numbers tell you where we are today. It really aren’t good at forecasting what’s going to be happening going forward. Okay. Let’s, that’s, that’s enough on options. Anything else you want to add, Andy, to, uh, what do we miss?
Speaker 2: (36:44)
Well, I think just in terms of, in terms of structure, uh, as we, as we said earlier, the, the front end has some downside and I think that, uh, we’re gonna see, uh, the, the curve is already, uh, beginning to, uh, weekend. Uh, these thread DCE which was flat is now moving into minus it’s minus 50, minus 60, may, maybe even, uh, maybe more than that. So, so we are beginning to see the, uh, the curve, um, weakening. And then we may see that over the, over the next couple of weeks. So those speculators that have been playing for backwardation and first half of the year, you know, that that hasn’t worked so far. You know, maybe, maybe as, as, as I meant, you know, maybe as we head into the second half of those little, you know, those we’ll do a little bit better. But the other interesting thing is that, uh, while the net length has, has really increased the net speculative length, the producers have really not been selling so far this year.
Speaker 2: (37:56)
Uh, they’ve, they’ve been really quiet. You haven’t really seen a big growth in a producer shorts down the curve. I think they sold, uh, the spike at Posto Pad, the post OPEC meeting. Uh, but the, they’ve, they’ve been pretty quiet. So, um, you know, they still have plenty of fire power, you know, as, as this market when and if this market, this market turns, I don’t get the sense that there, I think, I don’t get the sense that they’re going to sell it into the hall here. You know, I think, I think there’ll be, there’ll be patient, but, uh, the most of the action that
Speaker 1: (38:36)
we’ve been seeing in the market has, has been probably spec length, maybe some dealer selling into it. But, um, you know, we’re, we’re, the producers have been quiet. That’s very interesting. We, as we know, producers are probably the, uh, the eternal optimist when it comes to a price forecasting. It’s, there’s a, there’s always a rally around the corner and, uh, that may have something to do with it. They’re probably feeling pretty good about the market finally, after a tough couple of years. And, um, but I, I think you’re right. I don’t see, you just don’t, you saw some of that flurry right after, during, and right after the meeting. Um, maybe they put a traunch on or just are waiting for the next, a price target level, which may be around 60 bucks. So, yeah, I think they were very active in, uh, in December, but January there that just haven’t been there. Yep. Good stuff. Okay. Let’s, uh, let’s, let’s finish it off. This is Jim Colburn. I’m with Andy Lebow. We email@example.com. Check us out.
Speaker 4: (39:49)