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 Risked Revenue
Risked Revenue is a risk management consulting firm that provides analytical support and hedging expertise to businesses that strive for industry leading performance in their hedge programs. We assist senior staff in the development of their hedge programs by identifying appropriate and efficient hedge strategies that match hedge performance to budgetary objectives.
Risked Revenue has a 98% annual retention rate of retainer clients since inception.
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 here with Andy Lebow also of Commodity Research Group. We’re here with a special edition of our energy markets podcast.
You can learn more about us, at www.commodityresearchgroup.com where we post our podcasts and blog.
This podcast should be construed as market commentary merely observing economic, political and market conditions and is not intended to refer to or endorse any particular trading system, strategy or recommendation. We are not responsible for any trading decisions taken by anyone. Information is not guaranteed to be accurate. This is not an offer to buy or sell any derivative.
So today is April 1st and we have a very special guest for the second time on the podcast.
Andy Furman. Andy for the last 12 years has been a risk management consultant at Risked Revenue or R Squared. Risked Revenue was founded in 2001 as an independent commodity risk advisor that works with clients to build and maintain hedge programs.
How appropriate for these markets.
R Squared patented analytics assist clients ranging from S&PE and PS to private equity to energy consumers located in Houston. You can find more at Risked Revenue at www.riskedrevenue.com. That’s R I S K E D Revenue.com.
And I’m going to switch it over to Andy Lebow to take it from here.
Okay. Thank you very much Jim. And, uh, it’s such a pleasure to have Andy on our podcast today. I’ve known Andy both personally and professionally for a long time, and he is really one of the best in the industry giving hedge advice to all types of in the industry.
But one of his main clients of course, our, uh, PR, our crude producers. And, uh, what better time to talk about hedging really and hedge advice than, uh, than where we are right now also. And the has a book coming out I think the summer, which we will no doubt be talking about during the, during the podcast. So, Andy, welcome. And, uh, our first question, uh, is all right, the market has, the crude market has basically collapsed. The front month is trading at, uh, $20 right now. What are you telling your crew producer customers right now? Oh, first off, Jim and Andy, thanks for having us on the podcast. You know, I’m actually a regular listener, so, uh, we’re a real big fan of you guys. You guys do a great job of talking fundamentals and giving, uh, giving your listeners are a whole lot of good information about what’s going on in oil. In terms of the question, what are we telling our clients right now? Uh, you know, every client is different and you know, each client has their own risk profile. They have their own asset profile. You know, they have got assets for example, you know, where, where their assets located are. They are their assets in the Gulf are their assets, let’s say in the scoop stack. You know, it really, really depends. And, and you also have that, you know, it’s also, you know, another issue for them is credit capacity. So you have to look at each client individually and frame your answer for, for how you help them, uh, regarding what their profile is. Uh, but specifically speaking in terms of let’s say an individual, let’s say calls up right now, you, you walk through, uh, you know, what is their objective, uh, in terms of what are they trying to accomplish right now in terms of mitigating their risk.
And, uh, and then, you know, you want to try to dial into, uh, what kind of, you know, minimums they’re trying to defend in terms of, you know, trying to, you know, figure out what their minimum for successes. And then, and then from there you try to build a plan. Uh, once you’ve, once you’ve done that, you, you also try to, you know, go into the tactical area in terms of, you know, like, like the first things I just mentioned before were more strategic. You’ve got, you know, tactical questions in terms of how are you going to go about doing the hedge, you know, you know, in terms of whether you’re going to be, uh, doing it all now, or whether you’re going to be layering in pieces. What we try to advise our clients to do is make it a series of hedge decisions.
Uh, that’s one of the most important things that you can do. I think right now it’s just that, you know, clients right now in this kind of emotional environment where there’s just so much tumult and so much change, you know, in the last couple of weeks, uh, it’s impossible for there not to be a little bit of emotion involved. And so you can remove the emotion by making it a series of hedge decisions that you can. For example, let’s say you want to hedge three units of crude while you hedge one unit now and then you, uh, you know, turn it into a decision tree for, you know, how are you going to go about hedging the next two? Uh, it’s very, very important to have a decision tree because, uh, you know, many, many clients, for example, you know, on the sell side as a producer, there are going to be more comfortable, uh, in terms of all, well, if the price rises, what are we going to do?
Well, you also want to have a plan for what to do if prices go down, even if there’s no plan, um, to do, to do anything on the downside, that’s a plan. At least you can articulate that and then you can make better decisions that way. And you know, and you know you’ll be in control of what you’re going to do. And it’s, to me, it’s kind of been in a situation before where the market’s collapsing and you get a phone call from somebody who’s got like a producer and they said, well what do I do now? And it’s kind of, you know, you’re looking at the houses on fire and the guy wants to buy fire insurance today. And so, I mean, are you telling people, are you still putting hedges on at these levels for some, some clients or are you saying, you know, this is your, you’re better off waiting or how does that, are you still depends on who you’re talking to?
Absolutely. It depends on who you’re talking to. And the answer is really all of the above. We’ve got some clients that were, that we’re hedging for. We’ve got other clients who are considering removing hedges because they’re contemplating either, uh, scaling back their capex or potentially shutting in or potentially both. So everything runs the gamut, you know, everything is on the table in terms of being discussed and, and that’s really where we have to go. And that’s why each client has a different answer. Well, I was just gonna say, uh, we’re looking at, um, some of the pipeline companies telling their producers to not to cut back on production. And so I guess it is a situation that you’re seeing where you’re making money on the hedge, but the sort of, the basis to the cash to the area where you’re selling your crude is just falling apart.
Is that happening already or that could certainly be part of it. Uh, you know, I think as far as talking to our listeners and mentioning that, uh, like earlier today, I was looking at the screen and, uh, we had mid Kush, four and a half thousands of the screen. Uh, you know, that’s the, uh, Midland basis. We had, uh, you know, in that sun spot, uh, LLS minus four 75, H minus two 75, you know, those valleys were, were positive before, uh, you know, Russia and Saudi Arabia made their moves. And also with, you know, coronavirus and the, uh, you know, stay in place, shelter in place.
One question that, um, you know, talk, talking about, you know, a decision tree and, and where to hedge and the, you know, the market is a big carrier or contango as we as we call it in, uh, you know, in, in our market. And, you know, you look, you look out on the curve and you know, cow 20, the balance of cow twenties, like 29 and 21 is 35 and 2238 something, you know, on a swap basis. You know, are you advising clients to put their hedges, you know, in, in the backs and the front, you know, in the mid middle of the curve. And also, you know, what are you actually seeing them doing? Well, uh, I, I hope that your, uh, your listeners don’t think, Oh, this is a Dodge, but they’re doing the above. Right. Okay. You know, it’s, it’s really, you know, it’s a whole mix because, uh, let’s just say for argument’s sake, I have a client who is, is under hedged in 2020, they’re going to get a different answer than a client who was well hedged in 2020.
Right? Right. So, so, uh, we’ll, let’s just talk in some hypotheticals. Let’s just say for argument’s sake, I do have that client who’s well hedged, uh, in 2020, I would be telling them, Hey, let’s look at 2021 and see how you’re doing there. And, and maybe we can add some hedges here because you know, the fact that that you’ve got, um, the term structure is such, you know, with a really generous contango, $6 is not a bad deal to be able to, you know, hedge let’s say a $35 when you’ve got spot at like, you know, 2020 $1 you’re getting, you’re getting literally 14, $15 of lift right off of where a spot is. And we don’t know how long this price spore is going to last. We don’t know how long Corona virus lasts. And it was, everyone can say, you know, in very, very simple terms that Corona virus is going to, uh, you know, kind of fade out in the next couple of weeks and that, uh, you know, and everything’s going to improve. But, you know, we’re dealing a little with a lot of known unknowns. We don’t know what’s gonna look like, let’s say, uh, this summer and this fall in terms of how, how the virus comes back or even if it does really come back. And maybe, you know, you know, it’s like all these types of variables, we could be lower for longer and if we are lower for longer than that, certainly hedging at $35 now I think will work.
I think that’s a good point. And the, the, um, this is a, this is a double shock. It’s not just a demand shock, it’s a supply shock. So you could have the, uh, stock market recover based on, you know, the virus, you know, getting behind us a little bit, but you still have the, uh, the Saudi aggressive policy to deal with. So that, so I think you’re right. Just because one thing goes away doesn’t mean we’re moving into a more certain, uh, price environment.
Yeah. I don’t think that anyone can really predict with so many moving variables that, uh, that we are going to recover in price. And I certainly hope that we do for the sake of our producers. I, you know, I’d love for us to go back to $50 for, you know, for, you know, for them and for their economics. But that’s why we have to dial into the risk. You know, one of the things that we do when I mentioned, you know, in terms of having a discussion with our clients, we look at the low case risk and then we, you know, we determine, you know, w you know, at what, what are they going to look like at that price and, and you know, is there a way that we can hedge in order to bring that low for Scott.
And were you on the, on the floor during the Gulf war crisis? I was so you [inaudible] you were in the option’s ring at the time, right? That is correct. I was just going to ask you how difficult it is to get things off when you, when you have somebody who says, okay, let’s do a hedge. How, how is it with bid offer spreads and finding a market maker that’ll take the other side?
Well, uh, current conditions are certainly a lot tougher than they were. You know, it was just a month ago, you know, pre [inaudible], Saudi Arabia, slash Russia and the price war, you know, you could get, let’s say, you know, defeats, you know, from, you know, from midmarket to bid on swaps, you could do let’s say 15, 20 cents and now and now you’re seeing diffs, you know, of of 30 cents or more. Uh, so, so it’s, you know, it’s more challenging. And then also because counterparties are literally having to work from their homes. You know, it takes longer because you’ve got a trader in one home connecting with a marketer in another home. And so logistically there’s, there’s all kinds of challenges. It takes longer to do the hedge. Uh, there may not be as much liquidity and because the market’s moving around so quickly, uh, you know, they have to basically, you know, have a wider, you know, mid to bid.
Boy, I almost was thinking bring back the floor, but then this fire issue, you know, didn’t everybody get sick? Like it wasn’t her life. Something called a floor virus. Like the first two weeks you worked there, everybody got sick and then,
Oh, it was called flora disease core disease. Yeah, yeah, yeah, yes. It was called foot disease. And I had it. I got it.
So we won’t be bringing the floor back soon over it. I think you caught that floor disease. I did. I said you down there Gloria? I was crises. I was worthless I think. I think they just, I was just adding support. Andy, I have to bring this up because, um, it’s just mind boggling to me, but we’ve seen a dollar 50 puts trade in June, may and June. I put this stuff up on our blog and um, somebody commented that they were part of a $5 one 50 put spread. Th th I’m interested in the three-way strategy for uh, producers where you sell a call and you go to buy the put in, it’s too expensive and you sell the put underneath. And I’m wondering, uh, are you seeing those kinds of things go in this environment?
Ah, three ways. Yes. Uh, okay. What are you seeing? All strategies, I guess? Well, we are seeing all of them. Uh, generally speaking, our shop does not, um, does not push freeways, but at the same time, uh, it can make sense. Um, and with, with limited conditions, with limited amounts of the hedge book. And as a matter of fact, one of our clients actually used them successfully. And the reason why was that they did more hedge volumes because they were able to do three ways. In other words, in that kind of a situation where where you have a choice between hedging a L like X or hedging, maybe one and a half times X and that extra, you know, one third of your book is three ways. That’s a situation which works and makes a lot of sense. Okay. Where it doesn’t make sense is if your entire book is, is with three ways because then you lose your hedge program when the market drops, right. You never expect it to go down below the one that you’re short and then when it does, you’re out of luck. Yeah.
So, so we’re very, very mindful of that. We like to make sure that our clients at at worst have balanced and at best, you know, try to, uh, try to use other structures if they can. Sometimes they, you know, they want the extra premium from the sold side and that’s okay. Uh, just, just within limits.
Yeah, I, I find that, uh, are found that, um, when our hedgers started doubling up on the short call side and even sometimes tripling up, it was a, a sign that the market had a, uh, bottomed and turn in is about to turn around. I, I just thought that was, uh, not a good way to go. But if you’re only hedging, you know, these are, these are people that were putting on large hedges and if you’re only putting on a traunch, I guess that makes sense where you could sell to two calls to help finance a, you know, the purchase of the put. That sounds like almost like a little bit of an extensible. Yeah, it was a, you know, it’s just, it’s kind of a sign where, where you see, okay, market’s getting a little crazy, but Andy Lebow, what do you, what do you think of this? Uh, we had a, we had a EIA numbers today that shows a significant building in stock levels. You want to just make a couple comments on what we’re afraid that’s going to happen with storage filling up is in fact, if we’re, we’re not only afraid of it, but it is going to happen. I read the store, we were up 13 billion this week. We’re going to be continually up five, 10, 15 million a week until storage fills. I mean it’s, it’s inevitable. The record I think for crude stocks has, is 537 million. I think it sees a five 33 at five 37 we should get beyond that.
Uh, pretty easily. The available storage in the U S is said to be 600 million for crude. And, uh, you know, I think that what’s gonna happen is we’re going to test what the actual available storage is in the U S and globally. Which is why, you know, we’re seeing these humongous contango and Sandy mentioned, you know, it, it’s allowed on some of the producers to take advantage of that. But you know, I think the contango is may widen today. There was profit taking in, in the front, so the front was up in the backs were get, you know, I’ve got getting whacked today is April 1st so I think it’s, I think it’s inevitable. It’s hard. The, there’s really no way out because demand is, is not going to recover until some of these travel restrictions are lifted. So we’re at least for at least four weeks away from that.
But, um, I have a question. I, I have a guy who’s right, whose book is about to come out. Uh, the guy who wrote the book on options, Jim Colburn. My question is, you know, you have volatility here of, of what is it 120% higher than that or higher than that I’ve just talked to you about. Maybe that’s the second nearby or the third nearby w well, I said, uh, Oh, sorry. Go ahead Andy. Well, what do you do? You know, what do you do with it? What do you do with that? I mean, how do you approach the market with a, with a volatility that high and is it worth, you know, is it worth buying puts? Uh, and the, you mentioned three-ways and the firm and you mentioned three ways, you know, do you sell options here? I mean it’s, it’s a very tough to deal with. So I’m interested, you know, I’m, I’m, I’m anxious to hear what, what you have to say.
Well, I can go first and I can say that, you know, there was one
strategy that was put forth by someone. I don’t remember who it was. They were thinking about, well, what would, what would you do if you had to buy, you know, some kind of an at the money, you know, floors and half the money put. And the price at the time was, I forget exactly what the tenor was, but the price was like seven and a half dollars. It was like, there is no way, I think it must’ve been probably flex some kind of a 21 structure. I don’t remember exactly.
But the point is, is that when you start having to pay that kind of premium, well, there’s just no way that you can, you know, that that’s gonna make a lot of sense, right? I mean, you know, let’s just say for argument’s sake, your strike prices, let’s say 35, you know, the, the fact that the meter starts at 27 50, that’s not a very, very good way to, to protect yourself. So what we try to do is, uh, we would stay clear in, in a higher volatility situation like that and we would, we would advise, let’s say for example, using a costless collar. Uh, and, and I think closest collars can make a lot of sense here, especially in 21 where we’re, for example, let’s say, you know, you got $35 and you can do something like, you know, 30 by 40. And that way you’re funding the premium of the $30 floor with a $40 cap.
And, and you don’t have to lay out that kind of premium. I mean that’s just one way to kind of sidestep the issue of high volatility and make, you know, to make that work for, uh, what I will say though, in terms of, of paying for options is that this is one of the rare times where we’re actually buying options can make sense. And I’ll tell you why. Okay. If you believe, and I’m not saying that, that we’re there yet, okay. But if you do believe that you know, the sun is going to come out tomorrow and that prices are going to go back up, then you know, you want to have a lot more upside participation. So if you’re forced to hedge, if you know, for example, you’ve got some kind of, uh, you know, issues with, uh, with your debt or you know, like a debt covenant or, or what have you, where you need to make a a hedge and you don’t like the price well buying, you know, buying a couple of puts, buying some, some put protection on the downside.
Look at you, you know, for just a fixed premium there. Uh, you know, it’ll, it’ll satisfy covenance and at the same time, it’ll give you the [inaudible], you know, participation that you want need, you know, should prices, you know, go back up. For example, if, uh, you know, you know, the Russians can make some kind of, you know, you know, headway on, on, you know, pulling back from their stance with the Saudis and the Saudis can make up as well and, or you know, something with coronavirus a vaccine or what have you. So those are the kinds of, you know, that would be one kind of isolated example of where you would want to use a fixed premium put to, to protect yourself. It’s not necessarily the first choice, but in a situation where you think that the market can, can turn, uh, you know, that, that, that, that would present itself as a possibility.
I think that was, uh, one of the comments about looking at the premium. I mean, that’s kind of stuff when you’re trying to protect yourself, you’re, you know, forget about volatility for a second, but eyeball the premium and look at the, puts a strike that you’re trading. And does that make sense? Because you know, when we talk about volatility, that’s a, that’s a standard deviation measure that we’re using. When we go through the we, we, we, uh, back it out of a model that’s based on a normal distribution. And we know these aren’t normal market. So when the, when you’re really hedging and you, and you need a price on your barrel, like you’re in the real world, you, you really, you have to kind of eyeball the premium just, just like you said. And I agree with that. I’ve always had a problem calling something, a costless collar because that $40 call that you sell is giving the upside, but that’s what people call it. So I’ll let that, I’ll let that go. But that’s, I think that was a great, um, great comments that you just made.
Let me just, uh, um, add a little bit, uh, to this cause I don’t know if your listeners are actually gonna, you know, be familiar with this kind of concept is this, that most of the time, you know, someone wants to buy a put because they want to get the leverage right and there was a fear of speculator you’re buying a $10 put or $20 put because you want to see the market crash through that strike price and get like literally multiples of return for someone who holds an asset like oil for a producer that holds an asset, it’s completely the opposite. They’re not using leverage. So the reason for buying a put is because you have to buy the, you have to get the, the hedge and because you want the upside so that for example, let’s say you have a market which is trading at $25, you want to buy the $20 floor and hope the market just goes the complete opposite direction. Right? Other words, the fact that you’ve got $5 between where the market is and where your price, where the option is struck that $5, that’s, that’s a long ways away for you to start getting protection. So you’re, you’re basically trying to get that protection there just as a disaster essentially in case case the market, you know, we’re to have, you know, pricing on that marginal barrel and you were to see prices go down to let’s say $10 or Zara say even lower. So I think that, you know, if you, if you understand from the concept of, of the fact that you have an asset and then you’re not leveraged, that that’s the reason why you would do that kind of a strategy.
You turn it, you turn a long, uh, an asset that’s priced th that makes money when you go up. It’s almost like a turning a futures into a synthetic call by buying to put in the money call, deepen the money call. Exactly.
All right. Let’s talk a little bit about price direction. Do you, do either one of you think it’s possible for an asset to go to zero or four for a commodity to go to zero. Is it possible that we could see WTI go the WTI futures go to go to zero?
I think so, yeah. I mean, uh, the thing that I’m, the scenario I see, we saw a whole bunch of, uh, investment go into that USA oil contract and these folks are a speculators and they have to roll and sit the fifth and be between the fifth and 10th business day of the month. I think they still have those rules. And imagine if the storage fills up and they go to sell, you know, I don’t know, thousands of contracts, maybe tens of thousands, hundreds of thousands. And the buyer, which might be someone who takes advantage of all those sales and it’s going to take delivery, uh, is not there. So yeah, I could, I could see it, uh, getting a very, and in the market going down to zero.
Well, I’ll, I’ll throw in one other thing, which is that we have seen commodities trade negative as one as one example. You know, just recently we saw Wahaha gas go negative, which is the basis, you know, out in West Texas. So it really depends upon whether the, uh, the asset is stranded or not. And you know, we, we’ve got the most unique situation that I’ve ever seen in my career. I’m sure that you guys could probably, you know, uh, chime in and say, uh, you know, and corroborate that or not, you know, to have a price war at the same time as a demand collapse is, is unprecedented. I’ve never seen it. I’ve seen a price for, I’ve seen it demand collapse to have a price war at the same time as the demand collapse is just the kind of stuff that that’s, that’s the kind of recipe that could actually get you to zero.
I agree. I man, it’s, we finally have taken out the volatility highs of the Gulf war. That was always kind of the Gulf war one. You know, back in early nineties, we saw volatility trade up to like one 35 and now front months at one 88 the second months at one 53 at that, that was March 20th. That’s, that’s the high now. So I think the market is basically agreeing with you and say, Hey, we’ve never seen this before. And like I said, the $5 one 50 put spreads have traded in may and June. So, you know, this is people expecting the possibility that something, uh, this continues, you know, we’re, and we’re also seeing some physical crudes in the single digits. I mean, you look at, uh, the Canadian crew and West WCS is trading single digits. Permian is not single digits, but low teens. And, uh, I think there has been a, a, a crude that that traded close, you know, at least at least five or $6 saw a U S crude. So, you know, I don’t think, I’m not sure that the futures will go to zero, but, uh, certainly some of these physical crudes may, it may end up going negative. So, you know, we look at the front and, and piece of V this, this discussion, you know, and you say, Oh, it’s, you know, $20. That’s a horrendous price. You know, I guess everything’s relative, right?
Yeah. I mean, this zero prices a scenario that, I mean, Andy, I’ve been doing podcasts with you a long time and, and one of the things that I take away is that you, you know, we, we both agree on this as anything is possible and in, in this market, I mean, this is like ant, like Andy FERMA just said, we’ve never seen anything like this before. So yeah, everything’s, you know, everything’s possible here. So, well, I think, I think what I just like to point out is that, uh, under normal circumstances, if you see a demand collapse, what is your response as a, as a producer? The, the answer is of course, uh, to pull back, right? Right. That, that, uh, that lower prices would, uh, would make the supplier, you know, sell less. And so to have the Saudis, for example, you know, trying to, you know, ran these barrels down the market’s throat. In this kind of environment. It’s just frankly, it’s insane.
Yeah. And the economy’s not benefiting from the lower energy prices because there is no economy right now. Like I’m not, I haven’t driven my car in a couple of days, so, right. And we’re, we’re not, we’re, we’re not getting the demand response that these lower prices would, would usually would usually bring. Um, and that, you know, it’s gonna take, it’s going to take a long time I think for the, for uh, prices, prices to recover, you know, the, the men many months, probably many, many months.
All right. So I want to put you on the spot here. Andy, can you tell us, when do you think that, uh, that there’ll be tie up in Cushing? When would that fill?
That will probably fill, I would say by mid to late may that will be at a, that will be a tank tops, you know, late, latest, thoroughly churn. And you know, which is what we’re seeing again in the, in the front with the, with these super contango owes and the, the cash market at one point traded minus six 50. So it’s clearly on the way to, uh, to filling up crude runs of course are going to be cut in, uh, in pad too. And with Cushing, you know, showing a premium to almost every, every physical crude as you described and the, you know, every barrel that can get into Cushing and with the premiums if you have storage, you know, every barrel that can get into Cushing will get into Cushing. And, um, as a result, you know, it looks what we have is second and fourth week in may. I think it will be, uh, I think it’ll be full.
That’s, that’s really interesting because we have, um, may June minus six 50 puts is like 5,000 open interest on those in June, July, another 5,000 open interest minus six 50 puts that I made a point in our blog of when the minus $4 puts traded in. Now we’re seeing these a minus six, six 50, but you’re saying that’s where April, April, may went out? No, that’s for the fish. That’s where the physical cash roll is traded. Uh, the trade at six 50 on there. Right. So if that’s already happened, may June’s not my six 50 puts. Not that, not that crazy. Not crazy. All right.
I want to talk about, um, your book coming out. Andy, can you, can you tell us a little, tell us about what the title of the book is and what, what’s the book about, what the plot is? You know, we’re always anxious to see how things end, right? Well, uh, the title of the book is called risk as an asset. And, and what it’s about is just basically, you know, if you’re a consumer or producer or your midstream, you, you have to accept risk. Risk is a part of your business. And if you’ve got a, a positive, you know, outcome, a positive, expected value from, from, you know, running your business, you know, that’s good and you want, you want more of that, which means that you have to accept a certain amount of risk. And in terms of getting that positive outcome. And so what our book does is it goes through a lot.
We discuss a lot about risk driven hedging, uh, which is, you know, by using a process, uh, process risk management means that, you know, we’re going to, uh, have essentially a risk management discipline where we define a minimum low case risk for, you know, whether you’re an upstream or midstream or downstream, you know, client and, and that you’re going to take a look at that risk case and defend that risk case. So, you know, it’s, it’s a really, really good opportunity, um, especially considering what’s going on in today’s market to, to show how you can always defend a, uh, a risk case. You can’t defend the current prices unless you’ve had 100% hedge program, uh, from one day to the next. In other words, that you just were able to lock up every single barrel, uh, from let’s say, you know, Tuesday to Wednesday, uh, in practice that never happens.
Uh, in practice, what we’ve, we’ve rarely, rarely ever seen someone come in and, and just go from, let’s say, having a 0% hedge program to having 100% hedge program. It typically is, it’s just, it’s not going to go that way. So if that’s the case and you’ve got a base case, what you want to do is you want to have a, uh, a structure, a process for being able to manage that low case. And that low case for one client could be different than for another. It’s really what, you know, their minimum measure is for success. And, and so, uh, if, if I was for example, uh, you know, a consumer of, of crude oil at let’s say, $50, and I wanted to make sure that, um, that my costs didn’t go over $70, uh, than, than what we would do is we put that in budgetary terms.
You know, let’s say for example, that $70 was my bogey and, and we would manage that case so that we were able to use the process to make sure that you’re getting all the hedges that you need and nothing more. Uh, because, you know, w we want to, let’s say, have that risk, but we don’t want to have too much risk. And so we, we’re able to use that process to be able to define what that risk case is and make sure that that’s being properly managed. For the example of a producer in this case, if a producer is using this process for risk management, they would be able to look at their budget and they’d be able to see, Oh, okay, you know what? We have a certain amount of, uh, of debt EBITDA that that’s going to define our success. And then we can dial in from debt to EBITDA to, um, to how many, how many barrels that they need to have hedged. And in this case, so what it does is it removes the percent hedge and, and now you’re focused on an on budget story performance instead. So that’s really what we’re doing in the book. It may sound a little bit tri, uh, but it really works. It works fantastically well because you’re, you’re making sure that you’re meeting your budgetary numbers.
So presumably some of your producers have been following this way before the books coming out. And so they were probably in relatively decent shape going through this crisis because they have, uh, our clients typically and generally speaking, um, by just by the mere fact that they hire a hedge advisor, they typically are more hedged for starters. So, so what they’ll do is they’ll have, they’ll have more aggressive hedge programs and yes, they are, uh, in much, much better shape than that. Then the, the, you know, the other clients that are out there, uh, I say the other, you know, producers that are out there that are not clients generally speaking, because those clients are, are less hedged and they have more difficulty.
Well, [inaudible] revenue does a, does a great job. I do know, you know, I’ve, I’ve seen a lot of, a lot of, uh, or some of their presentations and, uh, Andy, you guys just do it to a terrific job. I know this is probably the most challenging time of your, your entire career, but, uh, I’m sure that that you’re giving go just, just listening to the advice you’ve given our listeners, you know, I’m sure you’re giving your clients, uh, unbelievable advice. Uh, I will put another plug in for research revenue because you and I, and the, I know you don’t, you may not remember this for earlier the year or late last year. You know, you’re, you were saying, Oh, you know, if the market ever gets a 55, you should really just hedge as much as you possibly can. And that, that was the, obviously that was an awesome call.
Well, thank you very much Andy. Uh, you know, on the other side of those fish driven hedges that we talk about a lot and we’ve, we’ve really focused a lot of the book on risk driven hedges. You know, the other side of it is the market driven hedges and market driven hedges are more opportunistic in terms of a more of a subjective call. Um, you know, you know, you’re trying to, you know, weigh a lot of, you know, factors in terms of, you know, the fact that you can go on offense and, and say, Hey, look, we’re, we’re getting a good price here. Maybe we’ve got a little bit of a geopolitical event, uh, fairly consistently. We’ve been advocating, uh, for a long while now. Hedges over $53 and then we’ll have a sudden, you know, late last year when when hedges were up at $58 you know, and let’s say, you know, Cal 20, we were just saying just hedge a current prices.
In other words, it wasn’t even like we had like a minimum target there because 53 was in the bag, you know, just just hedge to current prices. We liked the price and I think, you know, 2020 hindsight is very, very clear now that you know, in December when the Saudis did their IPO that that was pretty much about it. But we didn’t know that at the time. I mean everyone was kind of talking about it and then the market kept on going higher in the next month. But at the same time, you know, we kind of, you know, we definitely, we stuck to our guns and we kept on, you know, advising our clients to use that good price to hedge and, and the ones that did were, are in very, very good shape. A lot of our clients, many, many of our clients use that opportunity to, to put on really, really good hedges for Cal 20 and now and now some of them are looking at Cal 21 and we also love CIM and he had the, our clients don’t always listen to all, to all our advice as much as we may be them, you know, to do something. But, uh, it’s, it’s great that, uh, you know, you’re, you’re, you’ve got a lot of your heads, you know, you’ve got your clients to, to hedge aggressively. [inaudible] when the market, there were actually, there were a couple of spikes every week or you know, in the fourth quarter when the Saudi facilities were, were bombed by the Iranians, the market spike and uh, you know, when sold was killed, was that early? It was that only was that in Chan you wary when money was January? Yeah. Boy, it seems like it was about five years ago. Uh, Andy Lebow this questions for you. Are you happy you’re not on a desk right now? Yeah, I guess I am happy. I’m not [inaudible] desk right now doing, doing more advisory work. Very good. What else? Anything else Andy from, and you want to add to this discussion? Nanny Lebow what else? What are we missing here? Well, I just, just to sum up the fact that, you know, process risk management is, it’s just an organized way to, uh, enable clients to take control of their risk and, and, and do it consistently and, and make sure that they are able to reach their, their budgetary objectives. It’s a really, uh, good process that keep you out of trouble. And, uh, and with the next battle is gentlemen, the next battle is going to be for the consumer, right when they come back, when they come back. Very good. They will come back.
Okay guys. Very good guys. We should we wrap it up? We’re good. Let’s, let’s, let’s wrap it up.
Andy, we want to thank you for joining us. And again, you can find more about you and the company an www.risked revenue.com.
And when it, when is the book coming out, Andy?
Okay. And you’ll be able to find out it Amazon and Barns.
It’ll, if it’ll be on Amazon, you know, Forbes actually was the one who came to us about writing the book. So it’s a Forbes book and it’ll be on Amazon.
Beautiful. I love it. I love the title.
Yeah, me too.
And you can find us at www.commodityresearchgroup.com. My email is email@example.com and we should in about a couple of weeks, Jim and I will be back to be doing our usual monthly report. And I’m sure two weeks from now we’ll have plenty to, plenty to talk about, Jim, of course.
Okay. Thanks Andys.
Thank you very much for having us.
Okay, thank you.