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.
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 October 16th.
Good morning Andy Lebow.
Good morning Mr. Colburn.
As usual, we have a lot to talk about so let’s get right into it. Last week, the big three, the EIA, the IEA and OPEC all released their monthly oil market reports and um, the, the market seems to have a fixation with demand numbers. So why don’t you summarize what came out and what your thinking is?
Well, demand is definitely been a, uh, overriding factor, particularly over the last, uh, six months to this market. Maybe, maybe longer. Jim, the, the, as you said, the big three came out and they all pretty much shaved demand again, which has been, you know, month after month. Uh, I think we’ve been saying, Hey, I think these demand numbers, these estimates are too high, particularly on the, uh, particularly for the IEA. Uh, and they have decreased demand based on the expectations that because of what’s almost no one can almost say recession in manufacturing and uncertainty about trade, petroleum demand is directly effected and um, you know, as a result of the economy, uh, or concerns about the economy demand has been shaved you a couple of hundred thousand barrels a day almost in each report. Maybe even, maybe even more than that. The, um, IEA is, I think they’ve got 1 million demand growth for 2019 and 1.2 for 2020 but that is with a 1.6 million barrel per day demand growth in, uh, second half, which we said in our last podcast.
Yeah, I think that’s too high. They’ll end, you’ll end up shaving that as well. You still feel that way, right? Yeah. Yeah. I still, I still feel that way OPEC two reduced its demand that as did the EIA, you know, marginally. It’s amazing though that even though these forecasts are shaved by maybe a hundred or 200,000 barrels a day, the market still has a very, has a spasmodic reaction to negative negative news. And we see in the headlines, uh, fears about trade and economy is a reason why the market is down a dollar or a dollar 12. We saw that earlier this week. Um, you know, so some really is some down days and now, you know, we’re, we’re holding in right now it 52 50. So
with those demand numbers. Well, let’s just backtrack a little bit in, um, do you want to just bring us up to speed on, uh, what OPEC, I mean, obviously a big story last month was the attack on the Saudi oil fields. What’s, what’s the update with the OPEC, uh, production?
Well, we certainly have, um, yeah. Uh, last month when, during our podcast, I think it was, what do we do it of like the day or two after that attack. Yeah. And the market was up over 62 50. Frank was over, WTI was up over 62 50. I think Brent was over $70 at that point. And it was, you know, it was unclear as to how quickly the Saudis could get, it could get 5.7 million barrels a day back onto the, onto the market. And incredibly, you know, it was a two week affair. And certainly that, that’s one of the reasons, the main reason, uh, as well as this overriding concern on the demand side, uh, as to why the market has, um, you know, sold off, uh, so dramatically from, from the, from the highs. And in terms of OPEC, you know, the, they still [inaudible] they have a big challenge, uh, that they have an enormous challenge actually for next year. It looks like, you know, we always talk to him about the call on OPEC crude. It’s the, uh, it’s like the one number you could look at and figure out, you know, where is the market balanced as it is a too long, too short, you know, short sorta like, I guess war in baseball or, uh, what is it in basketball, P. E R
I think, you know what Andy, I think even with those numbers, I think we’re showing our age. I think they’re way beyond those now.
Oh, they’re way beyond those. But I think if you were looking at like one, you know, when I had to, you know, you had to go with it, how good a player is, you know, I think, I think it’s and a a P E R but you know for, for oil analysts it’s call on OPEC crude, which is the one number that you, you look at to see, all right, well if the call is X, what is OPEC have to produce to balance the market or have inventories draw that they obsess about, you know, OPEC itself is obsesses about it, you know, it, it’s where they want to, you know that they target their, their production based on what they think demand for their crude is going to be. And it looks like in third quarter, because there was a five and a half million barrel, 5.7 million barrel a day.
They lost in Saudi crude for two weeks. A OPEC production when it was down that uh, for the quarter was down the 29.3 and the um, call based on the average of the big three was like 30.7. So it looks like we drew stocks in third quarter, probably not that much, probably not 1.4. But you know, there, there was definitely a, a decent stock draw I think in uh, in, in third quarter. Now, fourth quarter looks a lot more balanced. Uh, the call on OPEC crude is about 30 million barrels a day using IEA, EIA and OPEC. And you know, OPEC production is probably gonna come in around 29, seven 29, eight this quarter. So, you know, we look balanced to two surplus. Now this is the, these are the two big numbers that, uh, is why the market is really on the defensive and, uh, where OPEC has its challenge.
Uh, if you look at first quarter call on OPEC crude using the big three, it’s 28.9. So, and the IAA is something like 28 to, you know, they’re really low. So if OPEX producing 29 seven, we’ve got a pretty big surplus in first quarter. Second quarter isn’t a whole lot better. It’s 28.7. So you know, again, you’re looking at a big first half surplus and that’s what, you know, the market is really why the market’s on the defensive, why it’s really concerned, why the IAA is, is keeps saying, you know, OPEC, OPEC really has a challenge for the first half and you know, OPEC knows it. And the other problem of course is now where you get this call on OPEC crude, it’s basically supplies global non-OPEC supplies plus OPEC, NGLs minus demand. Well, if demand is really, you know, if demand is a lot, a lot softer, I means the, the call on OPEC crude is going to be a lots, is going to be a lot softer. So, you know, again, you know those, they’re already up against it for the, for the first half. And you know, they know it. I mean this, this is no big, you know, this is no big revelation, you know, but you know, they are the two most, they are the most important numbers in the market right now.
Just to backtrack, I just have a question. We could, you could say yes or no, but, or you don’t need that. You don’t have to answer. But I mean, you think about the Aramco a IPO does what happened last month make you more willing to invest in that once it becomes a stock or less because they, they recovered incredibly quickly from a major attack on their oil fields. So that would say, wow, these guys are really good. On the other hand, there was an attack on their oil fields. They’re really vulnerable or more vulnerable than we may have.
Well, one would, IX, one would expect that they are tightening up on, uh, all vulnerabilities. Uh, you know, right now. And, um, you know, I, I think Aramco is coming out at a time where the oil stocks are way out of favor. The, there was an interesting article about how the oil index, you can see XLE as Fastly on the performed, even even crude prices, even even, you know, the, the outright WTI price or the print price. Right. And that’s for, you know, that’s, that’s for a variety of reasons, I think. Yes, invest in investment world is just not very enthusiastic about the sector. You know right now that certainly could change.
And your commentary so far has been there. The, the uh, sector has a vulnerability to a downside moving price from here
in the, at least in the, yeah, at least in the, um, in the short term. And now I want one has the one there, you know, how much is already discounted into the market. You know, we’ve got an OPEC meeting coming up and uh, assuming the, this let’s say demand falls another 200,000 barrels a day next year or 300,000 barrels a day. You know, I, I would S I think OPEC is, is looking at bigger cots, you know, somewhat bigger cuts and the Saudis, you know, certainly want to keep, you know, I think that the Saudis are gonna want to keep the market somewhat steady. If not, you know, the, their goal is certainly higher. I mean, they’re at sweet price. Their sweet spot for their budget, you know, is 70 to $80. Brent. So we’re, we’re far from that. And the other thing Jim is, is we still haven’t had any meaningful retaliation for the, for the, um, tack last month. You know, I guess they did a, you know, I guess they did some computer, you know, the a mass or at least they, they tried some hacking, some hacking. But you know, I still think we can await. I, I do believe there’ll be some type of response. So, um, Andy, I just want to
bring in my world a little bit. What we haven’t seen is a aggressive put buying say in that first quarter. Mean I look at the volume numbers and I see much more, uh, subdue total numbers, um, maybe around a hundred thousand or so. And then also I’ve seen days where there’s just been a dearth of put trading. It’s been like a, you know, sometimes three to one calls to put. So, so that tells me, and I, and again, I’m not, I’m not a, I don’t see the, uh, paper flow going through my, uh, grubby hands, like the old days. But, um, I, I think what’s happening here is that the, there’s upside call buying to protect against, you know, it could be market makers, you know, putting little upside protections should, you know, some kind of retaliatory event occur. But the, I, I don’t see the fear of the downside coming out with lots and lots of puts trading. So maybe, maybe that’s, you know, I don’t know, maybe they’re already like Mexico. Maybe they’re already covered for 20.
Yeah. Like we were like, you know, how much is already discounted into the, into the price here, you know, one had to S one has to assume that a lot of these numbers are already discounted. It’s just the question of, you know, are they going to get better or are they going to get worse? And you know, we also still have the, the winter ahead of us. You know, as you were remarking earlier this morning about a comment by, um, Spencer Dale, how important weather was to demand.
Yes. I saw him at a conference, uh, earlier in the year and he’s talking about the, uh, this was a GDP and whether is the, you know, main determinants of a demand and also price throw that in there as well. Yeah. I, and also Andy are we take, take the U S situation. We have a, you know, we had this, uh, hurricane bury that, put a little lid at or shot in some, um, uh, production. I mean that storm kind of hung around a little longer than, you know, these storms do. I think it was a couple of weeks, right. And, uh, took off a million barrels of oil and it wasn’t just the shut-ins with the terminals. I think that got shut down as well. Right. And, and so, you know, now we’re, we’re coming back, I think we got something like 12.7 in the latest weekly. Is that, I mean, I think that’s numbers. Caressed 12, six, 12, six. Okay. 12, six of, uh, production. And, uh, like you said, the surge is on its way or the F.
I mean, you look at the June numbers even before barium. I’m looking, the monthly numbers right now is 11.86 right? So the hour at 12, six, three months later. Where did
12 six but also, um, you know, the, we, when we’re in turnaround season and we probably have runs down, I mean there was some unanticipated uh, outages as well. Right. So, so we’re kind of like in this, we’re getting more, more supply and demand is, is down. So, um, what do you, what do you think about the idea that as we come out of turnarounds we’re going to be no, cause we, I think we drew from may to August, we drew a lot of barrels. So he was, yes we did after we got it built. So you don’t, you don’t see that, you know, once the turnarounds and then on outages come back, you don’t see that you continue to see builds in inventories?
I do because you know, let, let, let’s talk first of all on the, on the production side, what the, and this is going to be really important for the market actually for the global market is we’re a 12 six now. The EIA is looking for 12.95 in November and 13 in December. So this, so they’re saying that right? Yeah. That us production is going to grow by 400,000 barrels a day over the next, you know, over the next two months. And then, um, you know, in, in the first quarter pretty much plateauing right around, not plateauing but, but right around 1305 and second quarter 13 one which is still, you know, that’s still half a million barrels a day from where we are now. So the key is, you know, what, what’s going to happen to these barrels, you know, they’re going to have to be exported or you know, inventory or are they going to have to w or they’ll go into to us inventories and, sorry, go ahead.
Ah, and I think what we also mentioned about, you know, in our last podcast, well the, the, the curve was spiking like crazy at that point. But you know, I think, I think we had, maybe it was the podcast for four, that gem. Yeah. Mark was pretty well backwardated and, and both of us are like, ah, I don’t know. Yeah. That backwardation couldn’t sustain itself. And it’s really, I mean, it’s completely come off the front month is now contango and these are at DCIS, I don’t know, 10 cents a month maybe, you know, 15 cents a month.
Yeah. We, we, um, we talked about how, what we saw in the EIA production, uh, projections for stock levels, not jiving with what we were seeing in the back month to 2020 curve. And we actually spent seeing some, um, I dunno if it was just one, but somebody building a position and look like the a dollar 50, uh, calls in, uh, the spread options back in 2020 as well. So that, right. Like a dollar dollar 50, uh, calls. We’re building a open interest. So, um, it looked like some people were doing that. But my question is,
I think they were the, you know, in retrospect, you know, there was, it was that salad and you think the position was, was short. Those calls, Hey, it’s a good question. You never know what a, I know, you’d never know
who initiated it. I usually, usually those kinds of, uh, positions are initiated by the buyers, you know? Yeah, that’s right. Somebody putting on a big no on the put side for the spreads, it could be sellers because those are the people with storage facility. Right. So he’s hedging there. They’re put option. Anyway. My question was a takeaway capacity and in the fourth quarter, I mean that’s a big surge. Is it? I mean, I assume, I assume you don’t produce unless you have a pipeline, right?
It does. No, that’s the way it works. Yeah. Really I think, well, pipeline capacity is going is, is growing significantly to the point where there’s not going to be, you know, it doesn’t look like this is going to be a tightness of, of capacity. You know, like we saw last year when these, when these spreads, you know, when the Permian to use Euston in the Permian to WTI spreads, you know, pretty much collapsed. But you know, it looks as though four, fourth and first quarter we should be okay on, on, uh, on pipeline capacity. You know, the question is gonna be, you know, these spirals going to, I guess it’ll depend on what the prices, you know, will they go up to Cushing, will they go to Euston, you know, and if they go to use, then are they going to be stored or you know, export it.
And that’s going to depend, uh, obviously on where the, uh, on where the ARBs are and where the curves are. But you know, at least a quarter of the EIA, this a, there’s a lot of us supply on the way in the next four to six months and, uh, based on, and we have to figure out what to do with it. I was gonna say, based on past performance, we believe that that’s a good math. Those are good numbers. Yeah. Yup. Based on, well, you know, they’ve, they’ve, Oh, they’ve, for years they didn’t get it right. You know, the, I estimated that the other estimate it, yeah, maybe this is somewhat over estimated, but you know, we’ll see. I mean, we’re getting close to this fourth quarter surge. We’re in the fourth quarter, we’re in a S, you know, so, but it’s the November, December surge that um, you know, is, we’re almost right there. We’ll see. We’ll see where these numbers come in. So, um, I guess, uh,
the question, you know, when you’re talking about indicators, Oh, you were talking about a, the call on OPEC crude, but you know, the famous desert Island, if you’re stuck on a desert Island, would a would say the a four week average of U S crude oil exports be one of your desert Island indicators?
I think that would be a, yeah, that’s an important indicator. You know, these ARBs are going to be report lid Decatur. Clearly the number one number is going to be us crude production. Um, you know, the week, just the week, two weeks. Well, you know that that’s harder to do because they base it on the um, short term energy outlook that was just released, which is not the short term energy allocates I think on the, yeah, yeah. On the short term energy outlook, I’m sorry, the petroleum supply monthly. The monthly CIA please. Yeah, they base the term which are delayed, I mean their bill, Adelaide right there.
So we look at the weekly production numbers, which are basically a model they use and then they chew them up with the monthly. So, so we’re in October, the end of October, we get the monthly a supply report and that which, which production number will that be? That would be September’s, that’s September, September’s numbers. So it’s, so it’s a, and then they chew up the month. Got it. Yeah. So, um,
that’s going to come out the end of a October and then [inaudible] it’s either August or September.
Yeah. And they now round those and they round those. They round the monthly’s. I mean, I’m sorry, the weeklies, they met round the weeklies, which drives us crazy. But it, it’s true. You know, they, you have to do that. You can’t, you know, the, the, uh, they say the economists have a sense of humor because they use a, you know, decimal points in their estimates of GDP. And that’s kinda, you know, they, you, they’re showing us that that’s a number that they’re estimating. And it could be, you know, they can’t call it that close basically. Right. So we get, so we will trade off of these numbers, but they may not, they may or may not be a totally accurate
yeah. Um, the last, the last monthly sort of, or July, you know, or July data. So the next month these are gonna be August data, not September data.
So, and the, um, we, we ha in the news there was talk about China was at Sino cam talking about maybe uh, cutting runs because of, uh, shipping, uh, you know, the U S put some sanctions on their, their ships and shipping rates of sword and it costs more to get crude into the country in they’re looking at cutting runs. You want to just,
yeah. Another bearish, you know, that there’s another very bearish FAC or bearish factor for the market is on the, you know, on, on margins have really been hit because a VLCC rates have just skyrocketed. Not only because of the sanctions that the us has put a on, um, Chinese shipping company, but also the PG rates, Persian Gulf rates when, you know, have gone crazy because of the risk, uh, of going into the Persian Gulf. So here, uh, and maybe this is another reason why, you know, th the sectors done so poorly on the equity side, you know, refiners who are really hoping for fourth quarter and first quarter bounce on, refine on their margins, you know, based on the, the upcoming IMO 2020 change in shipping fuel, which is for, uh, lighter fuel. And, um, you know, sh w would help their margins. So right at that, at the same time what’s happened, you know, one of the, one of the big costs, the shipping costs have just skyrocketed, you know, by, by multiple dollars per barrel, you know, $7 a pound.
But this will help us refiners. Right. Cause they, they’re getting domestic crude. This should help. Yeah. Yeah. It should definitely help us, us refiners. And in fact, the, um, you know, the cracks have been pretty, the cracks have been pretty strong. Probably only two expectations that diesel diesel stocks, Jim, let’s, let’s talk about this’ll. It’s, I mean, this lets stocks are just outright low. Right now they’re at 127 million barrels a, which is 26 days supply versus a four year average of one 41 which is a 29 days fly. And you know, they’ve particularly low here in the Northeast where we actually, you know, we still use heating oil here. So, um, you know, you, you get a call winner or an early, we always talk about the early, late, late winter, but you know, you get, you get some cold weather into November and December and uh, diesel you’ve already seen, I mean, diesel stocks, diesel cracks are doing really well.
You know, we get a call winter and uh, that’s gonna remain pretty, pretty robust. So yeah, maybe it may be U S refiners certainly are advantage to it to assert. Yeah, there’s certainly advantage. So it’s, so when we’re seeing it over on these margins, the Asian margin, so our, our, you know, we’re not seeing that. And then, you know, certainly China’s talking about cutting runs, which is, should be bearish crude. And I’m bullish all this for find products down down the road. It never works that way. But yeah, the theory, that’s the theory, right. Let’s, let’s talk about prices and the, let’s talk about crude oil. So you just painted
up, I think, embarrassed picture going forward now, some of that’s already in the market. So going forward, we know w last year we had a tumbling market. I think maybe exaggerated, uh, as a, some oil company was liquidating positions in a thin market, but, um,
well we also had, you know, we also had a macro puke, but we did, that’s right. That’s right. Which we, uh, which we participated in. I’m going to quote you on that phrase. Macro puke. That’s a good one. You know, Akbar, the equity markets were,
yeah, just getting pummeled. Yes. So, so going, it’s, it’s, it’s October. What do you think going into the end of the year here?
Do I think, um, well I do think that we’ll probably see some, some, uh, production cuts coming out of coming out of OPEC. Um, I do think that we’re going to, you know, again, it’s hard to, it’s hard to predict on what kind of type of retaliation this and when the Saudis are gone or going to a, you know, where that goes. You know, do I see the market possibly getting on under 50? It’s, it’s possible. I mean, we’re at 53 right now, so, yeah, I mean, WTI could, could, could inch below could inch further below, uh, below 50 without a NOPEC Cod. Yeah, we’re pro, we’re, you know, I think we will be below, uh, below 50. And on the upside, you know, we had, we’ve been saying we like the return may be to, you know, maybe to upper fifties to 60. Now it’s looking more like, you know, the equilibrium price has been 55. Yeah, I could, I could still see, again, let’s talk about weather. I think we can get back up over 55, 56 57 60 is gonna be a 60 is going to be a real, uh, a real reach.
And, um, you know, I’ll ask you this, but what about the, uh, the volatility around this market and then it gets kinda, it’s, it’s going to keep the, the implied vol, uh, yesterday is around 37%. This is based on the second nearby September 16th, that would be the, the Monday after, uh, after the Saudi, uh, attack was 46.4 and then September 13th, it was 32, three and high of the year so far as January 2nd, 53. So I S you know, you see who does expected a Saudi attack on the oil fields on fire and you couldn’t, it’s not the high vol of the year.
Right. That’s unbelievable. Yeah, I bet. I blame the millennials. We blame them for everything. Right. Of course. My point is, is 37.1 is, is a little higher than average that that would be the, at the money second nearby December. So there is a little bit of a, you know, volatility expectation in there that’s higher than average. So I guess that’s kinda in line with what we’ve been seeing, you know, tweet orientated, uh, possibility of retaliation. And you know, we’ve got possibility of lower prices. So we still have 37 maybe, maybe you could dip a little bit further, but you know, again, what are we talking about here? It’s all about an OPEC meeting coming up. A, we’re talking about this is, it’s still isn’t as though the, the, uh, Iranian Saudi situation has been resolved. So we have that coming up. Right. So, you know, maybe that’s why volatility, given what the price action has been over the last, you know, 10 to 15 days, you know, maybe Y maybe relative to that, you know, that’s why volume is so high. It’s, it’s tough to solve with some looming events.
And, um, any China’s answer agree or disagree? No, no, I agree. I think it’s a pretty well priced. I’m just, uh, I’m surprised again at the, uh, sort of the dearth of, uh, put trading. It’s almost, I mean it’s, I looked at a, there’s a, there’s a website called the Barclay hedge doesn’t have anything to do with the bank, sparkly hedge.com and they track CTA money under management assets under management for CTA. And, um, I’m not sure how accurate it is, but I just track the changes and, and that’s been down. So, um, you know, this year, so it’s possible that, you know, what the option market is, is, is, has lost some, uh, sort of fun, their speculative activity. And maybe that’s what, what I’m picking up here, but I just thought you’d see more, uh, you know, uh, puts trading over calls. But yeah.
But again, you know, oil field on fire, people are right. You haven’t forgotten that, but that’s not resolved. It’s not resolved. Exactly. Um, you know, and, and again, this, there is a, uh, there is an OPEC meeting coming up. So yeah, I guess it doesn’t mean that the, uh, you know, these trade talks, you know, it has, you know, that that’s definitely had an impact on, uh, petroleum demand. I, you know, certainly the, the, uh, uncertainty, uh, as well as actual, you know, shipping costs have gone up. But, you know, I think demand, uh, for transport demand as is probably relatively relatively probably softer than it could have been. Right. You know, with w had we not had these trade Wars and then, um, cracks, you think, uh, uh, you mentioned this a little bullish. Uh, yeah, we’re, we’re in turnarounds right now. The IMO is coming up, so the, as of, uh, as of January so that there could be some dislocation there.
And, and I’m sure there’ll be plenty of confusion. So cracks and we have the, we have the global winter coming up. So I, I think margins, I think they’ll stay steady to, to maybe higher here. Con coming up again. Shipping costs are different, you know, and that’s, that’s a whole different thing. You know, the, the crack doesn’t quite take into account for that.
So, um, we covered a lot.
I’m sure we didn’t cover it all. Anything new, uh, want to add to this? I think we caught, yeah, I mean we, we definitely covered, we covered the NBA, major league baseball, Saudis and, uh, uh, we did cover a lot.
If you’re interested in learning more about us, check out our website, Jim posts pretty much every day. So it’s really interesting stuff. www.commodityresearchgroup.com. Terrific.
And, um, and we also have a presence on LinkedIn if anybody wants to connect with us where we just say yes to everybody, right?
Pretty much. Yeah. Everybody. Yeah. We’re, we’re easy. It sounds good. A lot selective.
All right, good. We’ll, uh, we’ll see you next month. This is Commodity Research Group signing off.