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.
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Today is March 13th.
Good morning, Andy. Good morning, Jim. Let’s talk about the oil markets. Let’s get right into it.
I wanted to start with the EIA came out with their monthly, a short term energy outlook yesterday. And, uh, they trimmed a world consumption by 60,000 barrels for this year and 80,000 for next year. Um, which, what’s your take on that?
Well, the, I think those are really minor, you know, 60,000 barrels a day versus 100 million is, is this really not a big, you know, a lot of big deal. Uh, I think it’s important that so far, and we’re going to learn from the IEA and Opec Wa tomorrow and Friday. What were their numbers come in? But we really haven’t seen these demand numbers being radically revised downward given all the hand wringing that was in the market, you know, over the last, last year about, uh, the, the economic slow down. And in fact, you know, the u s numbers are, so far I’ve been coming in, have been coming in pretty good.
Yeah. I mean they’re, they’re showing a growth of about what, 1.4 -1.5 million barrels of growth for 2019. And you know, that’s, that’s a pretty good number globally, globally. Yeah. Yeah. I’m in the U S I think they have like 200,000, I think China, they have up at 400,000. He, I, yeah, it’s a 200. Um, whereas China, yeah, China China’s up as well. Yeah.
The, the sort of the obligatory up 470,000 for China this year and for 80 for next year. So yeah, I think that’s a, a story that we’ve heard that, um, you know, and, and there’s also, um, the EIA had a piece of the correlation numbers for the price of crude oil versus the s and p 500, which, which of course is this, is this demand story going on. So, um, it’s, the correlation is, you know, it’s getting up there, I think it’s around 30, 38, something like that. The 30 day correlation is up to 38. So that’s, you know, that’s sort of what we were hearing from the news.
Oil Demand Picture
But what you’re saying is that we’re not actually seeing any really sharp decline in demand.
Not yet. Of course. That that can certainly change. The market is a awaiting a, what happens with Brexit and the trade talks, et Cetera, et cetera. It’s interesting talking about these correlations that even though, you know, we haven’t seen the actual numbers come off, you know, the market has a tendency to really get hit when there’s bad news on the, uh, on the macro front, you know, you’re like, it’s seemingly were automatically dot down a dollar. You know it with any, uh, you know, with any bad news.
And I think even though the fundamentals of really, you know, they’ve really improved, obviously given the price action since late December, you know, you still have this, um, like it’s sort of, uh, you know, it’s a bear trap almost buying it. You’re looking good, you’re happy, you know, and then you know, you’re down at dollar maybe Jim. Maybe that’s one of the reasons why we haven’t seen all that much a speculative action in this market that he was just got caught on the wrong side.
Yeah, yeah, yeah. Cause I, I mean, coming out of the OPEC meeting last year, we, we thought that the market would stabilize and, um, I guess there was a, the market reacted to the overhang, uh, that was out there and uh, and the stock market decline. And there might’ve been a couple of, um, uh, traders that were long hedgers to that, that had to liquidate. There was a couple stories in there. So, uh, yeah, obviously it was a point 20 hindsight. It was overdone on the downside.
But yeah. So, but even now, you know, you get, you get some really bad trading days, you know, where the market just gets, it just gets whacked.
Yeah. And you certainly don’t want to watch the financial news because it’s a, it’s an Oh my God world. I mean it’s every, everything is, you know, it’s the worst, worst day for crude in the last, uh, two weeks, you know, and the, and also, you know, what are, like, the bias for, for equities is that day up is good in a day down is bad. But for, for commodities you can easily short as you can go long. So, you know, if, if you’re saying oil had its best, best two months in a long time, how does it, how do they know I’m lonely whale? Yeah, that’s a great point. Anyway. Um, let’s look at the, the
IEA also trend world supply by CIA, the EIA, I’m sorry. Get them mixed up. The Energy Information Agency, the used to do a stats arm showed a decline of world supply for this year. 320,000, sorry. They trim their forecast this month from last month by 320,000 barrels a day. So that’s coming out of the U S and OPEC. And uh, what’s, what’s your take on that? Well, the, the u s lumber was uh, I think a trim of, what was it, a hundred a day, you know, they still have it off like around 1.4 million barrels a day. Maybe some of that, I think, you know, the revision downward there, there was a lot of the, there was a story in the, there was a Wall Street Journal about the parent child wells, uh, not coming hurting. The parent production may have, maybe they put that in their models, a rig counts have been down maybe.
And maybe that was in there. Uh, that’s in the models. But you know, we’re, we’re still growing pretty, you know, this is still pretty good growth and as we’ll talk about later, we’re really gonna need that. You know, we’re going to need us producers to come through when you start looking at what the, uh, you know, what the balances are go going forward. So, you know, we, we certainly did our, our production, the other amazing thing is that, um, the EIA predicted that we’re going to be a net petroleum export or by, I think it was fourth quarter of next of 2020 for you and me. Jim is just like, so it was just unbelievable. It’s unbelievable. Yeah. I mean, some of you listen to some of the politicians, they think it’s already happening, but it’s, but it may have happened for a month or so last year I think, but right on a regular basis that like you said, the Eia is looking for a fourth quarter 2020, where we become a net exports of crude oil and petroleum products.
Now in, in the same report, in the, in the short term energy outlook, uh, they did show crude stocks growing quite a bit in a second quarter. But you know what, yesterday or today, the, the Eia came out and the weeklies came out with a draw of a 3.8 owing to large owing to smaller net imports, imports her down exports. We’re, we’re okay. Uh, and they revise production down. So if you look at day supply on us crude, which is stocks divided by demand, it’s only 28.2 days versus a four year average of 30 days. So we probably will build stocks coming up as production, as production grows. But we’re going to start from a lower level. So, you know, I, I thought this week’s report was pretty bullish. I thought the EIA report, the short term energy outlook was, you know, sort of neutral, uh, for, for us balances.
So the, um, the, they did trim their inventories as, you know, it’s a, as you mentioned, the rig count also, they mentioned in their, in their, uh, in their, um, uh, monthly, um, let’s, let’s focus in on a OPEC production and the, I mean, you, after the meeting, you know, you thought that, uh, Saudis would do exactly what they said. Now it took a little while for the market to catch up to that. But, uh, what’s, what, what do you see, let’s, let’s talk about the Saudis, first of all, what’s, what do you think is going through there that, what’s, what’s her policy going forward, do you think? That’s a great question. She has always said, yeah, sure. That, you know, the entire oil market with love, with love. The answer to that one. Yeah. What’s your take on
they, they went from, you know, they increased for doc should and in fourth quarter at the behest of the Trump administration who was telling them that they were going to force the Iranians to go down to zero on, uh, on exports. They quickly had to do an about face because they realize, hey, the Trump administration granted waivers. So there was going to be a global surplus sewing to their increase in, uh, in November production. And then it took them a few months to get down.
They said they were going to get down to 10 million and then even lower nine, seven, nine, eight, you know, by, uh, by March. And I think when the march numbers come in, you know, that’s the, they’ll probably be around nine eight, which is down 1.2 from November. So the big question obviously is today at Ceraweek Brian Hook, who is working at State Department, um, I guess he’s assistant secretary of State or um, I actually don’t know his title, but he’s the one working on the, uh, on the Iranian sanctions said that the US wants to see Iranian exports go to zero. So if it does, you know that right now it’s about 1.3. I don’t think it’ll ever go to zero gym. Let’s say it goes down another half million to 700. You know, what are the Saudis going to do? They’re going to increase.
Crude Oil Options
I don’t know that not giving a lot indication that the, that they want to,yeah. That it gives me a time to bring up, you know, kind of where I spend some of my time in the world of options because the, um, if you think about the next OPEC meeting is April 17th, April 16th, the the May options go off the board the day before the meeting takes place and they go off the 16th. So, and then the sanctions decision will be made early, may as a May 4th, maybe may fest, something like that. May 4th. Yeah. So June options are alive for that.
So if you look at the volatility difference, you know, June is over May in fact June through DCE. Um, it’s, it’s kind of a, the, the vow curve is, is in, um, uh, a bit of contango. So, uh, the market, even though I mentioned vaults have come down sharply this year, um, the rest of the option market is saying, uh, this is maybe the calm before the storm, you know, so I will keep, keep an eye on that.
Uh, also the other thing is, is the option volume is really, it’s like 40% below last year at this time, year to date and evolves coming into this year. We’re up in the 50s, now they’re below 30. So that’s checks. Yeah. So, so there’s, you know, trying to, I’m trying to figure out if, uh, if we’ve actually lost some permanent volume from the, from the moves of last year. Uh, you know, we had a wild natural gas market that blew out some options. Sellers. Uh, we had this extended move down and crude oil and it looks like we lost at least maybe some speculative activity, but, um, you know, maybe even hedgers or you know, worried about or just not confident in, in, um, where to place edges as well. I think you’re right. I mean the, the, certainly the press was filled with a lot of big funds that closed last year in commodities.
You know, a, as, I, I don’t think anybody had that moved down to 42, you know, Alicia included, you would be, uh, you know, again, a lot of it came, came down to um, you know, a change and, uh, you know, what the, what the geopolitics were in terms of where, you know, where ran came in as well as the, you know, the overriding macro fears really tended to exacerbate the move down, uh, you know, trade talks, how the Fed, et Cetera, et Cetera. So I think there probably is a lot, a lot less, a lot less SPEC activity.
Yeah. So, yeah, last year, this time we were talking about the tightness of the, it was going to come into fourth quarter. So he had all this concentration of, uh, people buying a hundred dollar calls and Wti and Brent and, um, you know, uh, open interest got up to like 50,000 on each, something like that. And we don’t have anything over 30,000 and open interest. And when I look at the, um, like the top 10 calls, the [inaudible], uh, [inaudible] 2020, and the [inaudible] 2000 $1,900 calls are still in the top 10. And I don’t think the vent trait, you know, they haven’t traded significantly since, you know, maybe a couple of quarters ago. So, you know, it just tells you there’s
not a lot going on in the it world of options. I mean, it’s still over a hundred thousand contracts a day, but that’s nothing compared to what, nothing compared to what’s done with that. But that may change.
OPEC Meeting and Venezuela
You mean like we got, we have some really potentially, um, market moving events coming up, the OPEC meeting and, and the, and the sanctions decision. So let’s get back to OPAC because look what’s going on. If it, Olivia in December lost their biggest field, it’s coming back now. Uh, thankfully, because some markets going to need that. Actually it doesn’t really need it because it’s sweet crude. We lost Venezuela oil is just, you know, continuing to cycle down. Now there were blackouts, which means they can’t produce a storage is filling up. They can’t find ships. So, um, you know, the, the 1 million that they’re producing like 1.1 million barrels a day, you know, that could easily go another go down another two, three, 400,000 barrels a day. So maybe it Olympian Olympian barrels will replace that. But again, the Libyan barrels or sweet, we really need sour crude.
Right. And, uh, just an aside, um, I had heard a podcast link in the middle of last year was it, where the, the, uh, Venezuela at some of them as a crypto mining in and they were, um, exchanging the cryptocurrency for a food out of Miami. And that’s because of the power prices were subsidized. It very low. Uh, but they were intermittent. And now with these blackouts and also the price of a crypto coins is way down. I’m not sure that’s a, apparently the, the police found out about it and didn’t shut them down. They just asked for it. They just put up sort of a local tax on them. And uh, but I’m sure that’s not working anymore. It doesn’t work economically anymore either.
But what’s the other, another OPEC producers to watch of course is Nigeria where the delta ventures, which is a terrorist group threatened to, um, threatened to destroy some production facilities if the current president was reelected. And he was so that, that’s, you know, yet another one to watch. So yeah, obviously there’s, there’s a lot going on in, uh, in OPEC amongst the, in terms of the deal, you know, OPEC thanks. The Saudis, uh, has pretty much adhered to the adhere to the deal. And then of course as it is the geopolitical cutbacks. So OPEC production since November, you know, is down like a million and a half barrels a day.
Amazing. It really is amazing. And you know, you know, Jim, I like to look at those call, call on OPEC crude. Yes. Right now it looks like call on OPEC crude or the demand for OPEC crude for the first half of this year is, is very close to where their production is right now. Um, plus or minus a couple of hundred thousand barrels a day. So, you know, the market looks really, it looks very tightly balanced.
Yeah. I mean, a lot of times you win when the markets are imbalanced. You see a decline in market volatility. And then when it’s, you know, we’re producing more than we need is when the markets get really riled with wallets going on, we could actually see, you know, increased volatility in a balanced market because it’s, you know, maybe the Saudis overshoot or you know, uh, and maybe these, a lot of it has to do with u s policy too.
But, um, uh, there’s a lot going on. It might not be a counter that you might not get one, one bullish surprise and in one embarrassing surprise, it might be all in one way. But we’ll have to see how that unfolds.
Product Demand and Cracks
Let’s should we talk about gasoline now? Celine? Yeah. Yeah. Cause story cause got guests lean cracks of improved. What’s, what’s going on. There were mad prove that because um, us here, first of all, I guess lean, you know, look like I think in our, you know, one of our winter, you know, either December or January monthly’s or February, you know, I think I was probably saying, oh my God, yes, really it looks, it looks like it could go right down the tubes and you know, with what happened is that these Turner at getting out of turnaround says take it forever.
So production for gasoline is, is um, you know, [inaudible] down demand is demand is okay. And then as a result, you know, we’re, we’re drawing stocks. Um, pad one is tightened up, you know, it’s gone. It’s backwardated. Uh, certainly the cracks of have improved. The refinery cracks the real and you know, besides the Nymex cracks, the real refinery margins are, you know, made a big rally from like the January, Lowe’s, the beginning to stagnate here. But you know, gasoline in day supply is only is at 27 and a half or like versus a four year average of 26.8. So that’s half a day. It was like, I dunno, three, four days above a few months ago. Um, gasoline is definitely, uh, definitely improving globally. You know, the, the big question is where are we going on demand? You know, the, the, I think for 2019 demand will grow globally for gasoline.
You know, it’s, it’s, it’s not going to rip roar, but now it should be growing in the, um, we’re, we’re run, the runs were like 16 million today. It came out. Right. And what, uh, what do you think there? I mean 64, 16 five by now. Wow. You know, we’ve had all, you know, we’ve had problems extend the turnarounds, weather related stuff, you know, refinery issues. Exports have been, have been running pretty good. And uh, as I said, you know, demand is, demand has been okay. It looks like it may even be growing over the last year so far.
Yeah. The amazingly, um, so, so another thing, another hand wringing thing for all the electric vehicle obviously is a major, major factor, but you know, it’s not going to be 2019, I don’t think, you know, or probably 2020. It’s not yet. It’s not yet, but ethanol maybe. Yes, it all maybe ethanol, maybe. Um, diesel, just looking at looking at diesel, you know, that that seems to have stabilized around 136 million barrels the day supplies 34 and a half versus a four year average of 36.62 days lower. So not, you know, that that was much lower late last year early this, um, you know, diesels, diesel is going to be about the economy, the economy and I am a 20, 20, and that’s a whole nother podcast that we’re not going to talk about right now.
Cushing and Domestic Crude
Um, just backing up a little bit, let’s talk about, uh, Wti prices. No Cushing, uh, there’s been a couple of, uh, pipeline, uh, one pipeline that’s been, uh, switched from using natural gas to take crude oil into out of Midland into, uh, Cushing and has been another pipeline. Same thing happened. Natural gas was, was used for a NGL, now used for crude oil into the Gulf coast from Midland. And what’s, what’s, what’s that? Is that affecting prices of their other things going on?
Yeah, no, it’s definitely is because it was a couple of things going on. One is the sour crude is, is just tough to find. And we’re seeing some of these sat, some of these sour barrels, you know, really command big premiums. But even the sweet like LLS, you know, it’s way over, uh, Cushing Cushing inventories have grown, you know, grown pretty dramatically because again, because turnarounds, uh, in, in pad to have been, have been prolonged. Um, so as a result, you know, we’re, we’re seeing Cushing Cushing stock spilled, so you have mid continent week and the, the ports, you know, pretty strong because of, uh, export, export demand.
Uh, I think we hit a record at some point in the last few weeks and then we’re going to continue to increase on, uh, you know, on exports at the same time. Again, you know, the refiners who are going to have to figure out, okay, you know, the margins now, sour crude is so expensive that the margins aren’t that good. They may end up, you know, running, running more sweet and uh, you know, the, those differentials will, uh, you know, we’ll, we’ll weaken. So, you know, it’s going to be a pretty interesting, it’s always interesting. It was pretty interesting to see what they’re going to do. You know, what they’re going to run and what for crudes or, uh, you know, going to be, are going to be in demand.
So, um, let’s talk about price movement going forward. Um, we had sharp decline as you mentioned there late last year, I think it was December 24th, I’m market rallied.
Where Oil Prices Are Going
Um, let’s talk about crude oil. What did, what do you think from here given what’s the hell yeah, I think there’s still some upside. I mean we were, we were, we had been talking about potential for $60 Wti, maybe not in December when it was making new lows, but I think one of some of the monthly’s and certainly in our monthly report, so I, you know, we’re not that far from it. We’re, we’re not that far from it. Now. A lot of the balances are going to depend on the, as you said, it’s a geopolitical market. So, you know, we’re, we’re gonna we’re obviously going to be following what’s going on with the, um, you know, the waivers with the Saudis.
Do, you know, the market could go significantly higher if production doesn’t, you know, let’s say we don’t cut us production doesn’t come through and you know, the Saudis keep, you know, keep at like nine, nine, six, nine, eight, you know, we also, Brazil, Brazil is supposed to grow non OPEC production, so as to grow a lot this year. Uh Oh in mostly to us in Brazil. All right, so we’ll see if Brazil comes through. So I think that, you know, I sort of still like the upside, but there’s, you know, as I mentioned earlier, there are, there are those bear traps. They’re Jim, they’re all over the place. So it’s, it’s a tough, you know, I like it higher, but you know, you gotta be Nimble.
Gotta be Nimble. Okay. So what about, uh, you met, you talked about gasoline prices. What about going forward? You think there’s still going to do well, I mean, they’re going to,
I think, I think we may see, you know, this is a nice preseason rally, you know, I, because for the, you know, runs are going to go up, you know, they’re going to go up from 16 to 17 oversee, you know, 17, two, three, four and we’ll make more gasoline demand will go up. But I’m a little, you know, we may, we may be seeing, uh, you know, nice spring rally, right, right here and a diesel, you know, if the economy hangs together, I, that too could have, could have some upside. But you know, you start getting some, you know, you start getting some bad news on the trade talks or uh, you know, we slow further globally, you know, diesel, the diesel could be a factor but I mean it could be, you know, diesel could be under some pressure. But again, we will talk more about this Imo 20, 20.
Right. That’s like another outlier for uh, for diesel. Yes. So all in all, I don’t know about diesel is another wild card. Yeah. Okay. Well anything else you want to add to what we talked about today? What are we, what are we missing here? I think we covered it pretty well. Covered it pretty well.
I do want to add that if, if you’re interested in getting a monthly report, you can find us on our go to our website, which is brand new. It’s really good. Jim Posts some great stuff on there every day. www.commodityresearchgroup.com or if you want to get ahold of me, a Lebow, firstname.lastname@example.org.
Great. Thanks Andy. Talk to you next month. Thank you Jim.