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 September 17th, 2019.
Andy Lebow, we’re in the middle of a very fluid situation with what’s going on in Saudi Arabia. There is supposed to be a press conference at one o’clock eastern time today. Why don’t you catch us up on what’s going on.
Um, okay. Good Morning Jim. And, uh, hello to all our listeners. It’s been a pretty hectic three or four days in the, uh, in the oil markets. And, uh, Jim, I think both of us know why this, uh, you know, this happened over the weekend cause I think we, we had a meeting at global headquarters in Connecticut and both of us said, boy, the oil market is really, you know, it’s been trading in this range and, uh, you know, guaranteed, right? Things have gotten out, right. Uh, outright blurring on board. Uh, not for, you know, it wasn’t, it crude can be very interesting and, uh, you know, two or three days later it became a much more interesting than it had, uh, over the, over the past few weeks. And we’re just, we’re just a range bound. So we sit here, uh, Tuesday at noon and, uh, as a, as our listeners know, the Saudis lost 5.7 million barrels per day of, uh, crude capacity, crude export capacity or, or crew production.
Probably lost another million barrels a day of a refinery capacity owing to the natural gas issues that they had on a, um, on the attack. The U S is claiming that the attack came from around Saudis originally said it was the, a hoodie rebels from Yemen. And, uh, right now we don’t really have clarification on, uh, where attack came from. But um, you know, it’s looking more and more like, like it could have been, it could have been a ran, no, no word from the Saudis. It did look like this could be a, a major issue. And it still could be Jim, I mean, this, this is still could be, but the Saudis have come out to the press and said, uh, at Reuters in particular and uh, have said that they think they can, uh, get back to full capacity within a few weeks. Other analysts have been saying it may take months to, to get the, uh, to get production up to, uh, to 5.7. But, uh, obviously the, uh, the Saudis have scrambled and what are market, right, Jim?
Yeah, I think, uh, Andy W we’ve seen in market react today. It’s, it’s around a, it’s a little after 12 noon, moving sharply lower on, um, all the, I guess the, the fact that the, the, the stories that authority Ma, uh, so, uh, sorry, spokesperson said that stuff was coming back just as you mentioned, so maybe faster than what people had anticipated, but there is uncertainty as you also mentioned around what they say and what will actually happen. Uh, there’s uncertainty around uh, retaliation and there’s uncertainty around, um, uh, if, if the attacks, uh, happen again. So what do you think about, you know,
going lie, that’s a lot idea. That’s a lot of to put on my plate right at the right, right? Yeah, you’re right. There’s still a lot of uncertainty in the market. I mean, obviously if they are able to get this production up quickly, you know, in the, in the next couple of weeks, we’re not going to, the market is not going to suffer all that much of a, of a short following to the loss of a, owing to the loss of this, uh, of these barrels. You know, refined products, we’ll talk about a little bit later that that could have a bigger impact, but what they say and what actually happens, as you mentioned, Jim could be, you know, could, could be radically different as, as we’ve seen in u s infrastructure. Exactly. Uh, you know, when there’s been damage via the hurricanes or accidents, you know, it always seems to take much longer than, uh, than what they say. And, uh, you know, right now they’re singing a pretty optimistic tune. They do have, they do have backup, but, uh, these are pretty sophisticated, this a sophisticated plan and uh, whether, you know, whether it’s two or three weeks, I don’t know. I mean, that seems pretty quick to me.
Yeah. And you know, the, the, the fact that they’re saying they’re coming back quickly might take, you know, spr releases off the table for the near term. I mean, if you could find a situation where you, you start drifting higher or, you know, maybe it takes longer than they expected. So we don’t get a spr release because the news is, you know, comes out and drips and drabs rather than, you know, um, if they came out today and said, we’re not going to be back for months, then you’d get an spr release. And that’s,
you know, and that’s a key factor to the market. You know, the president Trump was all over talking about an spr release. The IEA has been a pretty vociferous saying that they have, that they do have emergency stocks, which they, they do, you know, they have 2.2 billion barrels of, uh, crude oil and refined products around the world, you know, uh, not only in the, in the u s but in, uh, in Europe and other, another strategic locations. So, you know, I th I think that’s, that’s definitely an giving some comfort to the market. Is these a, is the IEA stockpiles what, what’s problematic of course is if these are down, if productions down, you know, for any length of serious length of time, we, we really don’t have a lot of spare capacity, which is clearly bullish for the market. Uh, you know, maybe we could see production increases out of a, you know, maybe Russia, maybe Iraq, you know, the Saudis are, are, have some, you know, they have spare because they have the most spare capacity, which, uh, which, you know, again, it’s unclear what that, you know, how that’s being organized right now.
And of course there’s the neutral zone between Saudi and Kuwait, which is about 500 to 600,000 barrels a day. That’s been in a dispute for two years now. I mean, that’s been years. Uh, but, but that’s, you know, that’s some spare capacity as well. And it isn’t as though, you know, I know we’re going to talk about this more at length, you know, it isn’t as though the u s producers can just, you know, turn on a switch and automatically provide, you know, hundreds of thousands of barrels, you know, at a moment’s notice to the, uh, to the market. That’s, that’s not the case. Although that’s what they could, as we will discuss, they are due to increased production significantly between now and the end of the year. Anyway. You know, you know, Saudi shortfall or not, you know, those barrels are coming on.
Uh, before we get into, you know, uh, sort of the expected, uh, stock draws and builds, um, I just want to talk about something that, uh, we actually did see happen yesterday and that is the bump up in implied vol. We talk about a risk premium on the price of oil, uh, due to what, what happened. Uh, you can, uh, immediately, uh, that the cost of, uh, options has gone up. And, and so we were, if I’m looking at November options, we settled at the money settle around 32.3%, which is right at the long term, uh, average. If you go back to when these things started trading, that’s about where the longterm marriages we bumped up, uh, yesterday we settled at the money at 46.4, so that’s up 14.1 volatility, uh, increase. And um, you know, that’s, that’s a Whoa, that’s a big bump. However, it’s not the high of the year.
I mean, the high of the year was, uh, on, uh, January, uh, second when we were, we were above 50%. So, and that was, that was coming off that sharp decline in price. So, um, you know, that’s where we are. Th the, the other significant thing was that October options expire today. So I calculated a roughly a hundred thousand just qual options that went into the money over the weekend. And, um, I’d say about maybe 75% of those were probably expected to expire worthless. So that was kind of a, a shock. And it’s, it’s, it’s hard to say, you know, everybody did this, everybody did that because you, you know, you come in, you come in on Monday and you’re short a call option now it’s, you know, the prices in your face, you’ve got to take some action. If your long that option, it’s possible you take the counteraction to that.
But, you know, it doesn’t always work that way. So, so it’s hard to sort out, you know, everybody’s doing this, everybody’s doing that, but it’s, but you know, 100,000 call options all of a sudden became revelent relevant. And again, because they’re expiring today, they’re, they’re going in the money, which means they’re, they’re going to have quickly to have an afterlife as a futures contract. You know, they’re not going to go off the board quietly. So, uh, and now with the down day, a lot of those options that we’re going to be, uh, turn into futures contracts are now going off worthless. So it’s Kinda like this light switch going on. And often it’s probably, I’m guessing and you can’t know for sure. It’s probably adding to the volatility, not dampening it. So, um, think so you think that that covering caused was, you know, besides the news, do you think that that contributed to the big spikes in WTI and obviously Brent to, you know, as people had to take, take cover?
Yeah, I, you know, I think I don’t want to get the, uh, the tail wagging the dog. I always focus on the options. And I think that’s where the, you know, it’s like living in New York City, you think that’s the center of the universe. So you have to step back and say that this is the, this is the, uh, it’s really the tail. But you know, again, this is a, because it’s, you know, you, it’s such an extreme move and because these options are going off the board, um, they’re, they’re, it could have added to the [inaudible] and the people that really need to do something were the ones that were short options and maybe you know, short without any oil covering it or any futures covering. So yeah, they had to, you know, they had to act quickly and um, it may have helped drive the thing up, but if you’re short of your, if you’ve got a short position on of your fund or something like that, you also had to take, take action.
I guess the funds wouldn’t be short the front month, but if they had to, you know, but they, you know, their, their short position has definitely grown over the last, the last few weeks. And, uh, and months yes. But you know, to distract, monetize what you’re talking about. Gym, this thing, uh, crude settled that 54 85 on a, on Friday. Yes. You know, the next thing, you know, it’s opening at 61 48. So all those, if you are short, 60, 61 60, right, exactly. Make for a really happy weekend. And you know, one thing that’s been missing this year are our days when you see a a strike trade over 10,000 contracts. We had three of them and guess which one’s the a, they were the AWC 63, 6,465. They all traded over a 10,000. And the auction committee call was about 9,500. So yeah, that’s exactly. So he had people, uh, scrambling and um, and now we’re, we’re, we’re going to the other way or sort of at least for the short term, some regret on, on their actions, but they had to do what they had to do.
Yes. I, you know, one of the things, Andy, the, um, when we look at the spread options, um, it was a big trade took place in that the Novi d s 50 call about a over 16,000 traded, that’s a big number. And open interest declined by 15,000. So those 50 calls, the Novi d spread moved up by about 44 cents if my math is correct. So that pushed that call in the money and somebody took, you know, looks like somebody liquidated their, it’s a buyer and a seller liquidating. So it’s then it’s hard to attach who did what, but I’m guessing that it was the person that owned a call said, hey, this thing’s into money. Right. Yeah. Thank you very much. Thank you. Whoever, whoever shot those missiles off. Yes, exactly. So, yeah, right. You know, millions of dollars. So yeah, so that, and the final thing I’ll say is, um, there was a big volume, obviously 485,000, roughly.
That’s not the biggest. Uh, that’s probably the, again, I, I don’t find the, the, uh, change doesn’t put the, um, uh, record numbers anywhere. At least I can’t find them. But by my eyeballing, it’s probably the fourth or fifth record volume day. And what was missing was the put vine. So we had about 340,000 calls. Trade, obviously they are the, they’re the ones that, uh, we’re, we’re, uh, you know, going in the money a lot and, um, the puts traded about 146,000. So that’s a good number. So you, if you’re th some of that could have been hedging people taking advantage, you know, which now kind of leads us to say, what do we think the, uh, what do you think the u s producer response is going to be off of this spike?
Well, I, I think that, you know, yesterday, the, the cal 20 got up, you know, over over $55 50 might even have gotten up over 56 on a print. Who knows where it was actually training. But you know, what one would expect that or one would hope actually that the, that the u s producer Wa was in their hedging, either, you know, using futures or, you know, some, uh, options, you know, some options strategy because 55, you know, for some producers who have really been, you know, there’s been a lot of talk about producers on their extreme under severe stress, either because of debt or, um, you know, so some producers going, going out, you know, if they took advantage of this rally, you know, th this some existential risks if they can eliminate. Um, so one would, one would hope. And, uh, from what I heard there, there was some pretty good hedging in the, uh, in the back months in Jim. I th I think that’s the way to go. I mean, it’s particularly if you look again at, you know, any existential risks. Right, right. And, uh, almost certainly they’re not, you know, given what the, um, you know, given the news, uh, I’m sure that they certainly weren’t hedging while there, you know, everything from, for, you know, all their production. That wouldn’t be, that wouldn’t be prudent, I think. I think you have to.
Right. And also he buy, you know, buying puts, even though they’re more volatility sores, but still as a, as a producer, that’s not what you’re looking at. You’re looking at the strike price and then how much is the insurance, you know, what’s your effective, what’s your effective selling, uh, price should the market come off. So, yeah, I mean, it just makes a lot. It makes a lot of sense to do that. Which, which, um, you know, I guess the question is we’ve already the, the, uh, the big three, um, monthly oil reports have non-OPEC production increasing by quite a bit. Right? This spike add to it or does it just give producers a better price for the same oil they’re gonna produce anyway?
That’s, yeah. Yeah, that’s, that’s always, uh, they probably, some of them will be able to, to, to it. Uh, but at least they can, you know, look their banker and their investors in the eye and say, hey, we’re getting $55 for this, you know, that works for us right now that we protected our profit margin. And, um, you know, again, that’s the, that’s the beauty of, uh, of being able to hedge and if the, you know, this explodes higher, you know, the, they’ll presumably have some more bullets on their bankers and investors will be, we’ll be even happier. But you know, in terms of u s production, you know, the, the short term energy outlook is, is very interesting, Jim. Yeah. Right now I think our, our, we’re at about 12.4 I think was last week’s number if I’m not mistaken or right or right around there.
They have in, in the short term energy outlook, they’ve got September production expected or this month production expected to be 12.55 October 12.58. Then it jumps in November to 12.85 and December 12.92 and next January almost. You know, we’re, we’re looking at over 13 million barrels a day or up like 600,000 from now. You know that those are big numbers. Yeah. I mean is that like production that’s been held back due the pipeline constraints or is it just we keep pretty much we keep, yeah, well certainly yes. I think the, the pipeline constraints which are now, you know, as we head into the end of 19 and into 20 you know, there’ll be, there’ll be enough pipeline capacity to move barrels from Permian to the Gulf coast. You know, is evident as evidenced by you know, the Midland, the Midland differentials gym or like, you know, the training round inch unchanged versus what are they like 20 on?
There are some threes a couple of years ago. Right. So yeah, I think it is the pipeline plus, you know, the, there is certainly, we look at all the, the drill, you know, the ducks, the drill pub uncompleted wells. Yes. You know, maybe these higher prices, you know, we’ll bring some more volume in. But the, this was volume that the, at least the EIA, I don’t think, you know, I think other people including us, actually, I don’t think it’s going to be that high. You know, have modeled something lower than this. But you know, that’s clearly out in the market. Hey, you know, this, this number’s going up. You know, it was going up pretty radically anyway. You know, and this obviously came, you know, it was before, uh, the, the Saudi spike, you know, the CIA, this a short term energy outlook came out last week, last week, early last week. Yeah. So we’re due to, you know, we’re due to increase, increase production. And as you said, you know, in the other non-OPEC producers are, um, you know, w should, including the, you know, in addition to the u s or the Big Three of outlines growth in, uh, Brazil, which actually may happen
the gym. I know getting to happen. I know we’ve been teasing the Brazil for a while. You and I are,
you know, was the goal, but
oh, you know what was interesting to me was to see that in the IEA monthly they talked about, uh, you know, countries that are producing more than than is allowed under the, the agreement in Nigeria was one of them. And I said, oh, I haven’t seen that. Oh Wow.
They’ve had some, yeah, they’ve had some gains of late. Also the, there’s a big, there’s a couple of big fields coming out of Norway, uh, that may get up to, you know, they’re talking about six, 600,000 barrels a day next year. So,
sure. That’s not a wind farm. Andy on that would check how, sorry, I thought they were divesting oil. I guess I’d like to, I think, yeah, I think, well, I think they’re getting out. I think, isn’t there fun? Yeah. Divesting out of oil revenues are coming in from the fossil fuels, but they won’t go out that way. I don’t know. Anyway, I’m getting snarky here. Yeah, yeah. You’re definitely getting snarky, but so, so talk, talk about the, um, like the
What these guys have in for their expected, um, uh, stock builds going. So I keep thinking we have a lot more time left
here, but it’s already so we don’t know where, where it looks as though, let’s assume for the, just for this conversation that there isn’t, you know, that Saudi’s going to be up in two or three weeks and that’s a big assumption, you know, that that we were going to have to rework numbers based on where those, you know, where the, where they come in at. So it looks as though third quarter according to the big three. And also, you know what we’re looking at, I think we’re going to draw in second half of 19. It looks as though we’re going to draw about 400 to 500,000 barrels a day, which basically makes up for the builds that we had in the first half of the year, uh, of about 500. That five to 700,000 barrels a day. So net maybe we’ll build on build on the year, but the next, you know, actually we’re almost through the third quarter, but fourth quarter it also looks as though, you know, we, we will be drawing but then you run into, you know, you run into next year where, um, you know, the IEA has us at 28 five demand for OPEC crude.
I think it’s going to be higher at around 28, eight but they’re producing 29 eight so you’re looking at the first half looks ugly, you know, it looks like there could be a barrels a day stock built. Um, you know, we’ll see. Again, we’ll, we’ll, we’ll see what happened. I, you know, I’ve marked a man down, you know, everyone else has as well.
Yup. That’s it. Can I stop you there for a second and that, do you think these guys have stopped market? I mean the EIA has a marked down demand by a hundred thousand this month to for 2019 that they have a plus 0.9 uh, growth. And then for two 2020 they have plus 1.4. So, I mean, is it you w what do you think? I mean you think?
Yeah, I think the AIAA is still, you know, let’s see the EIA and the, I, the IAA incredibly still is looking at a big time. Second half, 19 they’re looking up 1.6 for s for a second half, 19. I, I don’t, yeah, I don’t recall what their, you know, I think they’re one, two, one 3 million barrels a day growth for, um, you know, for 20 for 2020. And what they’re banking on is petrochemicals, you know, right there, you know, they really think that, uh, petrochemical demand is gonna surge. There could be some, you know, we’ll see what happens with diesel. You know, with this I am of a 20, 20 staring us in the face. I will actually see what happens, you know, if there’s any change on, on that, given what, you know, the Saudi news is here and how that develops, you know, maybe that’s going to be, you know, maybe that’ll be postponed for a quarter, you know, just it’s possible.
Not Right. But, uh, but certainly possible. So it looks as though, you know, I think that a lot of these, you know, we heard Rick Perry and, um, we heard, uh, Fadi Buhr all of the IAA talk about that there was ample, you know, this ample inventory. The reality is it’s, I wouldn’t call it ample, you know, I’d call it like average, you know, it looks as though at the end, right now at the end, we look at the end of second quarter. If you take industry stocks and you take crude, you know, and you take ’em government stocks, we’re at 93 days. The both of them combined and the four year average is 95 days. So day supply. So, you know, we’re, we’re, I wouldn’t say we’re in any glut situation. Right. And which is evidenced by the, you know, you could look at the, the brand curve and you know, you’re not in any, you know, we’re not in any, any, uh, glut situation.
So the market is looking, obviously they’re feeling the, the draws currently and they’re looking ahead and seeing decent size builds. Right, right. Well, so, so when you look at the
curve, the, the, um, you’re getting dollar dollar of backwardation in some of the months in the, in 2020, does it, is that, what do you think about that? I think that that doesn’t make any sense because you know, you’re looking at, it looks as though again, these, all these numbers have to come through in terms of, uh, you know, the production, this, I’m talking about us now production, you know, has the, has the boom and imports, exports, runs, et Cetera, et cetera. But just using the EIA data and we use that. You know, I like looking at it cause they, I remember that, remember that we went to a presentation and what are the IAA guys was talking about his model? Oh yeah. Louis both. The way I thought it was, is really on it, you know, Udemy, it’s like wow, it’s a tough job. You know, it’s all this telling me about, right.
I tease the IEA monthly when I know, I guess it was in 2016 they came out with a report that said the world was a Washington oil. And they picked the bottom within a couple of weeks, but they’re crying, you know. But the thing is, people look at those numbers and say, know like OPEC will look at those numbers and say, wait, we have to do something, you know, in the market, right? Oh yeah. The market definitely reacts. So, um, yeah it’s, it’s, yeah, getting back to the point. Yes. So what the EIA has, they have stocks building up to crude U s crude stocks building up to a 494 million barrels in May of 2020, which would be 10 million over, you know, where we are, where we are this year and way above the, uh, way above the five year average. Even with runs, you know, they have, they have high runs.
So you know, we’re, we’re up over 500 million, which you know, would not really be a backwardated situation, you know, I guess with the market. But the curve is backwardated and I guess the market is anticipating, you know, this new pipeline capacity calming and Cushing draining. Um, you know, but it’s possible the Gulf, you know, things back up. Cause the Gulf coast gets constipated. Yes. Well that’s it. Yeah. I mean, I guess the market saying we’re going to look more like a Brent market and then a right WTI stranded stranded oil market I guess. Right. So, yeah, that’d be interesting to see how that plays out. Yeah. Um, now would I, I’m not sure I would sell the front and buy the backpack. Right? Yeah, yeah, of course. I think it’s the play, but you can’t, you know, it’s, it’s tough to do because this clearly, you know, we’ve got, we’ve got more to this episode, right?
Sham. I mean, yeah, it’s still, we have, again, on the faulting, we have the, you know, what’s the Saudi reaction going to be? Right. I don’t, could, you know, is it going to be military? Are we gonna really, you know, is there a conflagration in the future? I don’t, you know, yeah. I guess, um, what, what, what the, whatever the Saudis do, it’ll probably be in an area that doesn’t produce oil right now if it, you know, if they, uh, this is probably, uh, not a good idea to start thinking of these scenarios. But, um, cause it’ll, you know, there’s just a lot that could happen. It’s, it’s the retaliation from the retaliation. When the, you know, once they retaliate, then what happens? Then the Saudi oil fields are open for attack again. Right. You know? Exactly. And, and um, you know, again, it’s pretty hard to, uh, it’s pretty hard to handicap.
Um, given the, you know, given the players in the, in the region. Um, let’s take a little turn here and talk about product demand. Um, can you talk about gasoline and, and then diesel and, um, maybe fold that into the, uh, Imo, uh, uh, on the diesel. Yeah. We’ll say gasoline, gasoline, you know, as, as we’ve been really talking about all year, uh, has been, you know, US gasoline demand, this is unchanged, you know, plus or minus like it, like half a percent. And I don’t, you know, even with lower, you know, maybe we are getting a little little bump up with, uh, lower, uh, pump prices. But it does, it’s not going to be, you know, it does look like it’s gonna be a significant through the, through the end of the year. You know, I think on, uh, which is really as I’ve as I think we’ve talked about this for fortune, but you know, we get the bearish economic news or the bearish, you know, Chinese trade front news, that’s gasoline.
It always gets killed. Right. And they suck about, well the demand, you know, demand for gasoline demand for industrial fuels is going to be poor because of this, you know, it’s going to be unchanged. That’s what it is. Right. But yet the market can go down 10 cents on, you know, and not, not nonsense but you know, on I guess on sentiment, you know, globally, uh, the, there are, there is some Indian demand is not that great. Chinese demand has been okay for uh, for gasoline. I think that it, yeah, pump prices are lower than last year. They probably, you know, there are going to go up here if, depending on where a, you know, were crude as guessing was up 20 cents yesterday, I think the diesel is certainly the more interesting, you know, the more interesting product demand there has been. It hasn’t been great. You know, it hasn’t been as not, it really has not been great.
And that has been a direct reflection of some of the economic news and particularly on the manufacturing front. Right. You know, there, there, it does make sense if diesel gets, you know, if diesel gets hit, I guess it makes sense that gasoline gets hit, but probably not to the extent that you know that, that it does. Now what in terms of the IMO, the, um, what the, what we’re, what we’re not looking for, but the government is looking for, again, getting back to the EIA, they think that distillate production is going to really surge this year to make, um, lighter fuel, uh, for the, uh, for the IMO. In fact, this is an unbelievable number and I don’t believe this number, Jim, they have April and May, diesel production or distillate production at 5.8 5 million barrels a day in the u s last year it was 5.18.
So they’re looking for, you know, like six or 700,000 barrels a day increase on diesel production and of course a concomitant increase on diesel exports. Um, with, you know, those exports helping to May or may not help, um, to feed the, uh, Imo 2020 demand increase. It’s pretty interesting what they did. I, I think they’re in the, on this one. I think that full of it after I just went through the all, I love the ais, you know, this is I think is a, uh, this, I think I could, is it disagreement? They also, they don’t see demand spikes on, on diesel, you know, basis. The Imo, remember us sports of course are, are for Jones, you know, Jones tankers, right. Uh, mostly, um, the, uh, this, it’s unlikely that a, you know, a feed LCC is gonna fuel up in the u s you know, the more, more likely Caribbean or somewhere else too expensive.
So, um, this is a difficult question, but do you want to, uh, give us a sense of what you’re looking for going forward? I mean, in terms of price, that is, ah, yeah, sure. I, you know, I s as we said, we don’t, we don’t really think this is, or I don’t think this is over. Obviously, you know, does this fight, whatever the Saudis say. Um, there’s definitely, you know, we have to see how quickly they can get this back off. Right. You know, if it, if it’s two or three weeks, yeah. It will be less of a less of a deal if it goes forward. If it goes forward, then yeah, it’s important because you know, as we mentioned, the, the, there’s a shortfall in the market for third quarter and a little bit for a fourth quarter that’ll make up by, that’ll be made up by the, um, you know, by some added production elsewhere and probably in spr release or an IEA release.
Again, depending, depending, yeah, depending I think, but, and that, and then we’ve got the, the, you know, we don’t know what the response is going to be either, which, which response you mean right now? Like the geopolitical stuff. I was thinking demand response. Well that to, to higher prices. Yeah. Right. That too. Yeah. So, you know, I, I think the more the market’s from trading around 55 the, the WTI market for, for a while here, that clearly is going to move up. You know, this gotta be a risk premium because there’s more risk. Right. You know, this, no, even if the Saudis get these barrels out quick, you know, it isn’t as though they are, you know, particularly happy about being attacked by the, the Iranians, a few, you know, a few weeks before their IPO with the u n so, you know, there’s gotta be a risk premium, whether it’s $5, $10, I’m not sure.
So, you know, I think if the market trends back into the, you know, 55 57 area, I, you know, that that’s probably a good area of support. And you also like, um, diesel to outperform gasoline in terms of, yeah. Diesel should be running. Yeah. The Saudis have probably neat diesel that wouldn’t be running and putting on diesel, you know, heat to heat the gas spreads, but never butt cracks as well. You wouldn’t put these cracks. Should do. Yeah. We’re going into turnarounds also. So these little cracks should do pretty well. Um, so, um, so you, let’s think about news. You see, you’re looking, you obviously we’re going to look at the Saudi developments very closely, but then you’re going to be looking for what us production to see if that, yeah. Let’s see if that comes, comes to where the AIA says and then fourth quarter, you know, obviously all the geopolitical stuff and that and that, those numbers will show up in the, in the, uh, EIA weekly to start, right? Yeah. Right. I mean, they’re really pretty ambitious targets, I think. Um, you know, and then obviously it’s all going to be front page stuff and tweets. Yeah. Yes. Now, how would you play this? Let’s, let’s, you know, let’s, what do you think on options? Well, yeah, I mean,
listen, that you’re talking about a 46.4 40 fix and a half off. I’m not a big fan of selling options in a normal market. So now we’ve got a bid in there, but, but that’s probably a pretty good price for options based on what’s going on. But you know, do you, do you think, do you have a strong price view? I don’t if I had a strong price view that it was going to go down, I’d be buying puts. If it was that I was going to go up, I’d be buying calls that’s base basically. But you know, I’d have to eyeball it and say, okay, I’m paying this amount of money. I think the price is going to go here in kind of not look that, not worry about paying a high vol number that in that respect and then, you know, two months from now we could be in this at the same price and everything expires worthless.
But at least you know, from the get go how much you are risking. And I think that’s obviously that’s why they’re expensive because it’s a, it’s a, um, it’s a, it’s a, it’s a volatile situation. And, uh, one other thing is, I, you know, we, we, we look at our option models too to back into these, uh, volatility numbers and, um, you know, they, for, for years, back in the 80s, when I was teaching classes, we’d always point out, you know, the, the option models, uh, one of the assumptions is that prices trade continuously. So every, you know, the price and, and we saw a Monday, uh, we gapped a few, a few dollars. So, you know, it’s, um, we, we take, we take, we, we use the models for analysis, but we don’t, um, kind of live and die by them. People try to, well, we’ve in the past the trouble, right?
People have blown up big time, you know, going back to the old volume investor days is the first, uh, I think they were the originals. One of them anyway.
Anything else you want to add, Andy, to this, uh, market and, you know, be careful out there. I mean, yeah, definitely. Because that’s, that’s a, be careful out there first for sure. Yeah. Because as you know, as in any headline or as I said, any tweet, you know, you can change the whole dynamic, right? Yeah. When you say tweet, you talk about our president, of course, we didn’t cover that too much, but that’s kind of like assumed, right? Yeah.
Okay. So this is Jim Colburn, Commodity Research Group.com. Check us out and I’m with Andy Lebow and we’ll see you next month.
Okay. Thanks Jim. Thanks Andy. Talk to you later.