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: (00:08)
Good morning. This is Jim Colburn of 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.com where we post our monthly commodity reports, our daily metals reports, our blog and our podcasts. We’d 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 modules at EKT interactive com. This podcast should be construed as market commentary, merely observing economic, political, and market conditions, and is not intended to refer to any particular trading system you’re not responsible for for trading decisions taken by anyone. Not intended to. List information is not guaranteed to be accurate. This is not an offer to buy or sell. I need to record it. Today is May 1st. Good morning, Andy. Good morning, Jim. Uh, I’d like to start out today by, uh, talking about, uh, an iPod
Speaker 2: (01:31)
number that came out of the, uh, weekly petroleum, a status report, and that was the runs number of 17.285. Um, put that in perspective for us and talk about its implications.
Speaker 3: (01:47)
Well that is just an amazing number. Uh, the 17.3 is not only the highest run level ever for April, it’s the highest Strawn level effort and most of us had not expected that number till June, July, may, maybe August. To be quite frank, I wasn’t looking for that number at all. I thought that 17 one or 72 might be the high, neither was our government. Uh, the Eia had April runs at something like 16 one 16, too. And what’s amazing, Cim is that just came out like two weeks ago that they’re giving their predictions for April and May and June crude runs and the, and they were off by a over a million barrels a day in just two weeks. So that, that’s a big, big change in, in the fundamental picture and a, the ramifications of being seen. W W have been seen almost right away, uh, since the release of not only that number, but the prior number also was close to 17 million barrels a day. And, uh, you know, we’ve, we’ve seen it mostly in the gasoline and a naturally had a very negative impact on, uh, on crude as well.
Speaker 2: (03:12)
I noticed that earlier in the year, there was a number of 17.1, I think it was the first week in January. Right. And, and back then it was just a, an unbelievable number and, and subsequent weeks that the number came down. But, um, are you, is this, you think this number is going to, we’re going to stay up at this level and
Speaker 3: (03:31)
it possible? Uh, I, I, I don’t, um, I, I’m not sure it’s possible, uh, to stay at 17 three. We’re looking in our latest monthly report. Uh, we were looking for something for may around 17 and then maybe June or July, you know, plus or minus 17. You know, the key will be what happens to a refining margins, uh, as a result of, uh, the high crude run the number. What’s, what’s really panicking, the market, uh, giving a tremendous anxiety is the gasoline yields have not yet gotten to to summer levels were still at like 56, 57% gasoline yield and that’s going to go up to 61 62. So basically what’s going to happen if we stay at these numbers for, for April and into may is a, we’re going to just make a way too much, way too much gasoline and a, that’s really what the market is freaking out about.
Speaker 3: (04:33)
Uh, and you can see in the cracks, uh, that July gas crack has gone basically straight down from $20 to $15 in the last, uh, in the last week or two. Now, having said all that, and again, the other reason why the market’s freaking out is we’re not quite at the point where we’ll talk about economic rung cuts are not even close. I mean, margins, they’re not, they’re not great, but there’s still, there’s still runnable. So, um, this is a big change for the products and it really sets up a market conundrum because the high crude runs, obviously demand for crude is good. Demand recruit is great, you know, 73, it’s a million barrels a day more than, you know, the government that just put out in many, many analysts had thought. So you’ve got this great demand for crude, which is going to be bullish for crude, but you know, we really might mess up the, the guest Celine balances and the, and the diesel balances. So, um, Jim, I think I popping is exactly is exactly the word I use on that number. Well, it’s, let’s, that leads us into a
Speaker 2: (05:43)
know, it looks like we have this huge overflow of a crude oil stocks and we’re going to run them through a refineries and, um, hope that maybe gas demand bails us out. So let’s, let’s talk about, you know, the, I see the four week number also from this weekly a petroleum status report, a shows gas demand it, and 9.237 down 1.8% from last year’s numbers. And you know, why don’t you take us through that a little bit?
Speaker 3: (06:13)
Well, I think the gasoline demand this year, it’s really been volatile from, uh, from month to month. Um, January and February where uh, or not good. We’ll wait what? We’re going to get the February numbers. Um, so in other revise February numbers, maybe they’re already out. I haven’t seen them, but, uh, March the man was excellent and now April demand is soft. So we really need to absorb the, um, potential excess gasoline. We’re going to need huge numbers. It May, I mean we’re going to deed may gasoline demand to be up like 300, 400, maybe 500 a day from uh, April numbers and, and you know, maybe it’s possible given the volatility of, of the, of the month, some of the weeklies and the month to month. But you know, I don’t see it in the, I don’t, I don’t quite see that in the macro. And Jim, you posted a really interesting chart on miles driven, which was bullish, but I think there are other things going on and for a gasoline demand.
Speaker 2: (07:17)
Yeah, we talked about the basically two different narratives. One is that we’re not driving anymore and that would be the life, the lifestyle changes idea that we’re all staying home watching Netflix, eating dominoes pizza and not going to malls. And yet when you look at the miles driven, we’re at, I think these were DLT, uh, February numbers. They are at record levels. So, so both narratives in a way or correct. You know, if you look at our, uh, miles driven per capita, it’s nowhere near the, uh, the record. But if you look at miles driven totally, we are, you know, doing pretty well. So it’s, the economy is, is, seems to be flattening out a little bit, but we are, there were more people at work than there were last year at this time. So you would expect to see, um, you know, maybe a flat or I think, I think the EIA is looking for a flat gasoline demand 2017 over over 2016. Is that correct?
Speaker 3: (08:17)
Yeah, it’s just maybe 50 to a hundred plus or minus. And right
Speaker 2: (08:23)
when we look at the overall demand in the, in the world that the, the big three are looking for what a million 0.3, 2000000.5, a 2017 over 16 increase. And that’s with a roughly a flat gasoline demand. So we don’t really need, you know, gasoline demand to be sharply above last year. But see we need it flat for would be pretty good.
Speaker 3: (08:50)
Flat would be good. Growth is going to be good. I mean the, the u s is going to need a, it’s going to need a pop here. This, uh, the summer or export demand is gonna is gonna have to continue to, uh, to grow. That’s been a little bit disappointing so far this year. So we’re going to have to, we’re going to need another, uh, another a hundred to 200 a day, um, increase in export demand coming up or you know, we’re going to have to get into some type of, some type of economic run cuts, sweat when, when, and if a march and soften. Then looking at these cracks in the three to ones, you know, the, they’re softening, but you know, refiners are going to, fires are going to run for fires, are going to run through May. And I could get, you know, again, this could be problematic.
Speaker 3: (09:35)
Now, one good thing is I’m diesels in a little bit better shape. Um, I think the balances look, uh, look better. Diesel demand globally has been pretty good. Export demand has been outstanding, so us export demand has been outstanding. We actually sent some, uh, um, you know, we’ve been sending barrels to Latin America, uh, and demand there has, has been good ag demand in May, should be, should be pretty good as as a the plantings plantings increased so, so at least diesel doesn’t look quite as problematic as, as gasoline, but they both, you know, both something to watch. And that’s the thing that I think maybe the markets, you know, the market is clearly about to focus on the OPEC meeting, but you know, the market has this, um, real laser focus on us production numbers, which is important going down, going down the road. But right now we really need to focus on what’s going on in the, in, on the product balances. Cause you know, demand, again, demand for crude is going to be good. It doesn’t really matter what April or May a US crude production is going to be cause demand has been so good. Runs a bit so good. So, you know, I think it’s important that that um, traders, analysts focus and focus on what’s going on in the products. And maybe that’s going on. I mean maybe, maybe that’s going on given what’s happening with the cracks right now.
Speaker 2: (11:04)
Well, that’s a good point of maybe underline. We, we, um, if you look at some of the, uh, uh, the financial news and they, and they report on a weekly a petroleum report, they’ve, they’ll tell you what the, uh, crude stocks have done. Uh, but what you’re saying is maybe if we dig a little deeper into that report and start focusing in on gasoline demand coming up as we go into the season, you think that’s like, you know, if, if I put, if I put you on a desert island and gave you one indicator, is that the thing that you’d want to see right now?
Speaker 3: (11:39)
Uh, probably, yeah. What we’re, where we’re guessing we’re to gasoline demand would be right. They’d probably want to see a few other things. Right. Of course. By myself. That’s true. Yes.
Speaker 2: (11:54)
Oh, of course. Um, let’s move on to another eye-popping a number in the report was a crude exports. 1.15, 2 million. Um, what, what is it, what’s that number all about? Where’s, where’s it going? What’s a, what’s going on there?
Speaker 3: (12:11)
That is a, yeah, that was, uh, an eye popping number. Again, it’s just the one, a one week number. The four week numbers have been, I’ve been pretty good because, because of that, but, um, US crudes are, uh, going to Asia. They’re going to Latin America and the, and they’re going to Europe. And, um, you know, Europe really does it need it to be, to be quite frank. I mean I think that the marginal export barrel from a, the u s and to into northwest Europe, uh, served, it was one of the barest factors on the branch structure because friend structure, uh, really weakened. Last month, uh, we saw that we saw structured go from a flat to a slight contango to uh, uh, big contango. Uh, and we also saw 40 screwed, which is uh, which is a, um, physical barrel go from like plus 30 to minus 60 in a in a week or two. So, um, you know, it was, I was just one of the u s bowel is just one of the, one of the factors that um, undermine Brant, the, the arb to Asia closed for a little bit. So, uh, so that, so that soften but, but there is, there could be some really some good things happening. There should be some good things happening on the bread market and that could clear up, you know, that could clear up really quickly,
Speaker 2: (13:36)
which leads us to another important talked about issues, US oil production and um, it, it just, I guess my basic question here is, is our EIA still chasing this number or they kind of behind the curve with their estimates? Uh, in their last report they showed a Q four, 2018, a u s oil production at 10.12, which is another big right, big number. Yeah, yeah. I mean for a quarter that could, could be a right in 1970, we in October, November we produce slightly over 10 million, but I’m not, not for the quarter. So that’s a, that’s a huge number. But they still may be it. I mean it looks like there may maybe underestimating that. What do you think?
Speaker 3: (14:26)
I think it’s, it’s certainly possible. There was a, uh, one of, one of the think tanks put out a number, uh, that they thought us production was going to grow 100,000 a month, um, this year. So if that’s the case, you know, from, from here on out. So, uh, there are eight months left, so as the 800 will get us over 10 million by the end, that by the end of the year, that’s a mom. I think that may be a little optimistic. The other, the other providers. So there was that prices had to remain between 50 and 55. Yeah, I sorta think they will and we’ll talk about that later. But, um, you know, I think a hundred may be too optimistic. I think the US is looking for 30, uh, 30 a day grow 30,000 a month growth. I think that’s too low. So it’s probably somewhere in, you know, somewhere in the middle, like 68, 60 or 70 a day, maybe once, I’m sorry, 67, 60, 70,000 a day, every month. So, um, you know, I think that’s Prob, I think that’s probably the number. Um, and that’ll get us to like nine, seven, nine, eight, but by the end of the year.
Speaker 2: (15:39)
Yeah, it’s a, I mean, we, we certainly don’t want to look out too far, but you know, you, you start to see in the press these, um, no producers, uh, the IEA and other, the President of Aramco, other producers talking about how we’re, we’re not spending enough money to offset the, uh, expected increase in demand and the expected a decline in some of the oil wells. So, so, you know, down the road it’s going to, the question is, can, can the fracking, uh, offset some of that, but that’s way down the road down the road about that. I’m sure you’re like a penis. You have like peak demand or peak supply anyway. Um, just quickly to manage money. We, uh, it looks like we saw a sharp drop in net length.
Speaker 3: (16:27)
Right, right. And I think part of the, you know, the last few weeks trade has been, you know, getting in and getting, it looks like a specs and specs out because you had, um, the net length from March 28th to April 11th. And just two weeks, uh, increase in Wti by like 65,060 5,000 more or less. And Brant and then last week and then in the, in the next two weeks, uh, they’re down 75,000, you know, each one of those. So it’s kind of like, all right, you get in and then you get out. And I think that that’s a lot of the, you know, that’s a lot of the trade that we trade, that we’ve seen. Um, you know, buying on the expected, you know, on, on the expected rebalance and you know, the upcoming OPEC meeting and, you know, it’s clear, uh, the markets getting tired of the rebalance talk. Um, and you know, in, in first quarter we probably, according to the IEA, um, you know, we didn’t trust stocks we made have been flat or even global stocks building a hundred and 200,000 and in second quarter, uh, we’re probably net, you know, I’m not, we’re going to, we’re going
Speaker 2: (17:50)
to draw that much until we head into two. We had into June or July. We keep pushing it. We keep pushing that. We keep kicking that thing back. I want to make a couple comments in the world of options. Um, we saw pemex come out and hedge, uh, reportedly, uh, 409,000 barrels a day from May to December. That’s a, that’s a big number that they’re producing. What two point 1000002.2, something like that. Right. And um, the interesting thing you came out of, uh, it did not come out of Mexico is a, you know, finance a group. It came out of the Pemex, the DOL company. We haven’t seen that before. Um, you know, I don’t want to say anything other than that, that, that they, that’s a big number and that that gets in the way that gets into the sort of the oil market is through the market maker a process.
Speaker 2: (18:44)
So the people on the other side sell the puts and they’ll turn around and sell futures against that. So some of that Barish, uh, it’s a bearish trade if I buy puts that doesn’t get into the market, uh, uh, through that process. Um, interest in the implied volatility for June, that’s the front month is around 24 and a half. And July is 28. Usually doesn’t do that. I usually the, the front month is the highest implied law, but we do have an OPEC meeting, um, in between these options. Expiration. So, so June goes off on May 17th, then you have the OPEC meeting on May 25th and uh, yeah, June goes up May 17th, and then July goes off of 15, the 15th of June. So July is alive for the OPEC meeting. June is gone and used to, you see that, uh, um, spread the front month valve collapse versus the second month.
Speaker 2: (19:49)
July is 28%. And going into the last OPEC meeting that we had and uh, late, uh, uh, November of volatility was around 50%. So you can see, um, a lot more, uh, nervousness over that one. And then this one, and we’ll, we’ll talk about that OPEC meeting and just, just a second. But having said that, June is sort of a dead for it as an option. We’ve seen a huge buildup in June 55 calls to the, to the tune of 87,000, uh, almost an 80, 88,000 contracts in open interest. It’s settled at 7 cents on, on Friday. So there are people, obviously there’s buyers and sellers. I’m guessing that a lot of that open interest was initiated by the buyer. So, uh, there’s some people that think we’re gonna see some pretty good price action to the upside. Um, uh, even, even before OPEC meets. Um, the other, the other open interest in the 60 calls and in June have 59,000. That’s a, that’s a big number two at that option’s been around a long time. So a lot of those positions were put on a long time ago. And then the [inaudible] also has a big 49,008 75. You know, despite this, the recent weakness, I think there’s still people out there that are looking at this market being closer to 60 bucks by the end of the, um, uh, as, as we go towards the end of the year. Um, okay. So let’s talk about the OPEC meeting May 25th. Uh, what, what are your thoughts on that, Andy?
Speaker 3: (21:33)
Well, uh, I think, uh, as I wrote in the, in our monthly report, the, I think the market is probably putting something like 80, 75, 80, 85% chance that a, this is going to be a rollover, which means there’s still a 20% chance that, uh, there isn’t going to be it be a roll over. But, um, I don’t, I, I happen to go with the market. I think there’s an 80% chance of a rollover. Uh, I don’t really see, um, you know, the, clearly it’s going to be a lot of downside if there is no rollover because the market doesn’t have room for an extra 1.5 million barrels a day. Right now. Uh, obviously the, um, you know, the Russians have more or less complied. A OPEC has complied very nicely. I mean, they’re, they’re probably above 100% compliance and even with some added Libyan production and, uh, maybe a couple of more cargoes coming out of Nigeria, you know, they’re, they’re, they’re going to be right around a million to a million to cutting back.
Speaker 3: (22:45)
So that’s, yeah, that, that’s a clearly to their credit and, uh, most of us didn’t think they’d be able to do it, but, but, uh, but they have, so, you know, in my opinion, they’re very close to, um, to the beginning of a fairly significant rebalance. Uh, and they’ve gone this far, so I really don’t see why, uh, you know, they should just play it out. It’s only been four months so far. Um, and the second half of the year, uh, the market does, it does, look, if you take, uh, the, the call on OPEC crude from the big three, um, you know, you’re looking at a million barrels a day of, uh, of deficits if they’re producing around around 32. So, you know, we are going to start drawing stocks and uh, you know, it be drawing, we should be on paper trying a million barrels a day. So, um, you know, I think they should, you know, they’ve got to allow this, they’ve got allow this deal to work and it’s, you know, it’s about to start working, you know, they’re only a few months, a few months away. So I, I think, I think they’re going to roll it over.
Speaker 2: (23:59)
It’s interesting to me. Um, this, this Saudi Aramco IPO is interesting to me because, you know, if, if you are, uh, producing oil as Saudi Arabia, you might have one pricing idea. Uh, you know, you’re, you’re, you have this a cartel put together. If you’re, if you’re producing as a, as a shareholder owned a company, I would think that you would start, you would be developing more aggressively fields and, and be more aggressive on producing. Um, but the IPO is a, it’s going to be a small amount of small percent of, uh, of, uh, public shareholders. It’ll still be smoothly movie run pretty much the same way as it’s been run in the past. Um, so, you know, I, it’s a wait and see. I mean we, we, we really don’t know if this thing’s going to be successful with what you’re telling me is you think it will be. And that would lead you to what price projection, say going out a month, two months?
Speaker 3: (25:06)
Well, I think there’s still a chance that clearly the market has to stabilize. It’s, it’s today’s May 1st it’s, it’s down again today, but, uh, the market needs to find some stability. I think that, you know, it’s interesting you point about the 55 numbers, such big number. It isn’t big number. Right. You know, cause that’s, that’s really, um, it’s, it’s a technical number as well. And I could see TEI a working its way given the demand for Tci at least, uh, through a demand for us crew. It’s anyway through these higher crude runs, you know, trying to work its way back into the low to, you know, to the low fifties, you know, 53 area, something, something like that. You know, may maybe 5,500 reach again. I think as we pointed out, uh, in the beginning comments, demand is going to have to be the particular us gasoline demand is going to have to be pretty good. But, uh, you know, in the market, I think it could, it can move back over the next couple of months, you know, made me to the low fifties, maybe it may maybe into fifth navy, you know, on a, on a real reach and it’s a 55.
Speaker 2: (26:17)
Right. And I, you know, that also, uh, you’d expect a structure to firm up a little bit too, correct.
Speaker 3: (26:25)
Yeah, yeah. And it, it has, it went into a, uh, you know, it started going into contango as, um, like the, the [inaudible], uh, which is very careful, carefully watched, um, what was softening and now it’s beginning to in shop, you know, it’s forgetting to come back. As, as, as, as the first two months. Um, you know, the big thing to watch is the branch structure I think for, uh, for traders to watch the, uh, what’s going on for em, you know, the first month versus the second month. You know, to see that, to see if that’s beginning to come in because it may indicate that the market’s beginning to, um, you know, show some signs of strength. We have, um, may off, we’ve got field maintenances coming up coming up in June. So, um, you know, I’d be watching, I’d be watching the, the brand structure carefully in the and the Tei structure. Obviously, you know, secondarily, uh, actually the first thing I’d be watching as cracks, I think that’s going to be a key thing. Right?
Speaker 2: (27:32)
Very good. I, I, one of the trades that, uh, uh, people linked to do with that view that maybe we chop around sideways to hire is selling a put. And then if you have the structure working in your favor, where you’re moving from, say a, uh, contango to a backwardated market that that, uh, will also help you as time goes. You know, you get time to k and they’ll also moving up on the, uh, on the, on the role that the curve is as well as time goes by. And of course the big downside is if, uh, you know, the, the, the, uh, balance doesn’t come in, the market’s down blowing through your strike price. It’s so, it’s unlimited risk on the downside. But those are, those are traits that people like to do to take advantage of that. That few I just mentioned,
Speaker 3: (28:19)
right. You’d have to, you probably want that 80% OPEC roll over to get to like a hundred percent of that crawl off. Yes. The market, obviously it’s
Speaker 2: (28:34)
yes, in it as a, you know, one person during the Gulf War, one said, uh, when vows were up around 120%, they said, why don’t we sell vile here? And the problem was because, uh, you got to, what was it? Uh, I can’t remember. Was it an $18 gap from the next price gap down? And then that’s the profit coming out of an OPEC meeting. You, you know, you, if you’re short options, you, you, uh, the market could gap through your strike. And that’s, that’s one of the risks. But, but as I mentioned, the, um, uh, July vile is 28%. Um, the market doesn’t seem to be, it seems to be, as you said, 80% as far as pricing, uh, a rollover over to this meeting. So. Okay. Um, anything else you want to talk about here, Andy? Uh, it was, uh, going forward, you said that gas demand cracks we want to keep an eye on. Um, we kind of covered everything.
Speaker 3: (29:32)
Yeah, I think, I think we did. I mean there’s this, the uh, the big macro trades, but I, I think, I guess soil has some part of the, uh, you know, rush and rush out m and s and some of these, uh, Trump reflation traits, you know, seem to be going by the, by the boards. But, um, you know, I think for oil, a lot of, you know, what, what’s key is it’s own, uh, it’s own in the terminal fundamentals. And, uh, again, we’re gonna, we have a big event coming up later, later in the month.
Speaker 2: (30:05)
Yeah. You know, the other thing that I hear is that people talking about how even in some of these markets that are trading range markets, there’s violence within the range. So you, you know, you mentioned the speculative money moving in and out. I mean, when we, at the end of the year, we might look back and say, oh, that was a pretty well defined range. Yet when you’re, when you’re living through, it just doesn’t feel that way. It feels like this market sits in, it’s like an, oh my God kind of mark.
Speaker 1: (30:37)
Okay, thanks Andy. Jim Colburn, Andy Lebow, commodity research group. Check out our website
Speaker 4: (30:45)
Speaker 1: (30:47)
Talk to you next month.