Commodity Research Group (CRG) is an independent research consultancy specializing in base and precious metals, as well energy products. The Group provides research and general price analysis for these markets, along with advice to companies seeking to construct hedging strategies.
In this podcast, oil market experts Andrew Lebow and Jim Colburn discuss key fundamental forces driving oil prices in both the futures and options markets.
About Your Hosts
Andrew Lebow has been involved in the energy derivative area since 1980. He began his career with Shearson Lehman Brothers where he worked in the initial formulation and marketing of the NYMEX WTI crude contract in 1983 as well as the NYMEX gasoline contract in 1985.
Mr. Lebow has appeared before the State Government of Alaska as well as the State Department of Defense to discuss hedging techniques. Mr. Lebow is also well known as a market analyst and is quoted frequently in the financial press. He has appeared on television on CNBC, NBC, CNN, CBS, and PBS. Mr. Lebow holds a BA from Lafayette College and an MBA from the Kellogg School of Management at Northwestern University
Jim Colburn is a futures and options professional with 30 years of wide ranging experience in commodity markets. For much of his career, at Man Financial (1989-2011) and Jefferies LLC (2012-2013), Mr. Colburn worked with major integrated oil companies, hedge funds, pension funds and other entities to develop market hedging and trading strategies.
He has conducted trading, hedging and risk management workshops in energy markets worldwide.
Mr. Colburn is a published author on options trading, hedging, market making and risk management. In 1986, while at the New York Mercantile Exchange, Mr. Colburn helped develop new markets in energy option contracts by educating the oil industry, banks, floor traders and brokers, worldwide.
Good morning. This is Jim Colburn of Commodity Research Group.
I’m with Andy Lebow also of Commodity Research Group and we’re here to talk about energy markets.
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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 trading decisions taken by anyone. Information is not guaranteed to be accurate. This is not an offer to buy or sell any derivative.
Today is April 16th. Good morning, Andy.
Good morning, Jim. How’s it going today?
It’s going. It’s going well today. Yes. Well, we had I’ll say eventful month, but let’s just focus on this past week. We had OPEC+ agreements as we came into Monday. Why don’t we start off by talking about the agreement itself and what you think is going to happen.
Okay. That the agreement was only was only over the weekend that she was like a month ago. But yeah, OPA OPEC plus cam came to an agreement, uh, with, with, uh, some prodding from the, uh, from the U S and, uh, you know what, Jim, I thought overall it was, it was as good an agreement as, as they could have come up with, given what the fundamentals of the market is and, uh, how they couldn’t balance the market or, or failed to balance the market. Uh, the IEA pretty much pointed that out today, uh, in its, uh, in release of its report. I guess I would, that was, uh, that was yesterday, yesterday. Uh, given, given the extent of the, the demand declines, it would have been impossible for a OPEC OPEC plus and the rest of the non-OPEC producers to, uh, to balance the market. It was, it just, you know, the, it wasn’t going to happen. So the, that they were able to come up with an agreement. I, I think, uh, we’ll be positive down the road. No doubt it would be positive. Some of the numbers are certainly very suspect. There’s a lot of, um, there’s a lot of like, hopeful mass involved in, in some of these, uh, in some of these production cuts. You know, some of these cuts are simply not going to happen, but nevertheless, production is going to be caught in some numbers and it’s going to serve, uh, eventually, uh, help to, to balance this market.
Yeah. Um, one of the, I’m quoting from the IEA report, uh, never before has the oil industry come this close to testing. It’s legit. Just takes capacity to the limit. So I guess, uh, they’re, they’re, what they’re, they’re basically saying that you said that the measures are encouraging. Uh, but they won’t balance, uh, the market immediately.
No, they’re, they’re not in the market is, the market is certainly reflecting it is, uh, the pricing of the front end of WTI and brand relative to the backs. And, and we’ll, we’ll be talking about that I’m sure at legs gym where we start talking about these when we talk about the, uh, spreads. But to me as a longtime observer of, uh, of these markets and, uh, a guy who has, you know, pretty much spent his career trying to do these balances and, uh, you know, I, I’ve, I’ve never seen numbers that, that are this far apart, not only in terms of where the, where the demand expectations are, but also where the supply expectations are. You know, I, I used to be upset if I would, if I was off by half a million or a million barrels a day. Now we’re looking at deltas of, uh, of 10 to 20 million barrels a day on, uh, on both as the supply end and the demand side. And, uh, uh, that, that certainly makes it very difficult to, uh, do any type of, uh, of price forecasting. But nevertheless, we keep trying. Um, we keep trying. Yeah.
So the, um, the initial reaction on, uh, I guess it was, we’ll talk about WTI. The may contract was down, but the rest of the curve was up. Particularly, you go out a few months was up over a dollar. Right. So that would, you know, to me I said, OK, that’s, that’s probably makes sense. They’re going to cut back a lot. Maybe we get some demand, uh, coming back a third quarter of the year. And um, you know, supply does meet demand, but it’s probably too late for the may contract. I mean, what, what was your take on that?
Yeah, I agree with you. I mean the may, we’ve got all these barrels coming in, in both in April and then again in may. So, um, you know, calendar April, uh, and then again in, uh, in may. So as a result and runs crude runs are being caught. So these co, the, the OPEC plus production costs certainly are not going to come and will not have any effect on the, uh, on the spot month. Now as supplies come in, crude supplies come in and demand for crude in terms of our run cuts goes down. Obviously stocks are gonna, stocks are going to build, crude stocks are going to build and this spread between the front month and the back month is going to widen out. And we saw that, we saw that last week, we saw that early this week, we saw the, the front, the may June get out to over $7 a barrel, which indicates that this really though storage available uncommitted storage available in, in, uh, in Cushing. It since has rallied. But, uh, you know, the, the market’s telling us that, uh, it’s really going to be fill up, filled up in the Midcontinent. You know, I think we said in our last podcast we were at, we were expecting, uh, it to be filled in in may and certainly laid as June.
Yeah. We, we, uh, what we see a plus a 19 million barrel number in crude oil this week in the weekly numbers and uh, uh, Cushing up a 5 million. So you’re, are you saying that storage has got in Cushing, say he’s got maybe four weeks, month, month and a half before they’re filtered a brim? Is that what that’s sort of looks like? Yeah. Four to six weeks we’ll be, we’ll be filled to the brim at uh, at Cushing. Now there’s still looks like there’s some storage available in the, in the Gulf coast pad one and pad five. The storage for that, you know, it doesn’t matter that much. So yeah. And we’re seeing that in some of the, if you look at some of the grades, the contango on the grades, the, the carry on, on some of the grades like LLS or um, used and it’s not quite as wide as as where it is on a WTI. So there, there is this storage along the Gulf coast, but that’s going to get filled too.
Yeah. And that’s where the, uh, the government, uh, is offered what, 20 million barrels of storage, something like that in the Gulf coast area. Right, right. The government is, the governments are offering a strategic reserve storage and the salt cavern, so along the Gulf coast, which is I think a great idea, Jim.
Yeah, right. I do too. I think they should have done that. It should be, they should be do that. Do that on a regular basis if they can, if there’s demand for it. But, um, I just want to point out that on Tuesday we saw some massive liquidation of the, uh, spread options. Some people have been buying a deep out of the money puts on the may, June spread only to see them go deep into the money. So they started with a minus four strike all the way down to the minus six 50 strike. And on Tuesday, uh, we saw about a almost a 14,000 lots of open interest declined. So that’s a big number for the spread options. I mean, it’s not, it’s not the only thing going on. It’s also possible they’re buying up. When these things go deep in the money, they, they want to get out.
They don’t like the bid offer spread. They’re so deep into money, they can buy the spread against it. They can buy the may June spread futures. So that could be why. Uh, we’ve seen a little bit of a bounce in the spread. And then the last piece of that is today is the, um, WTI, the may option, uh, expiration in those puts have gone in the money, absolute prices, flat prices gone down sharply. If you’re, if you’re long a put, like if you’re a producer, there’s no rush for you to get out. You just let it keep going. You know, if you short the put, you probably covered it in some way already. So they’re, they’re sitting out there, you know, they probably, if you, if you’re deep in the money, you’re probably gonna buy futures against it. And um, that might be what’s giving nay a little strength right now because the fundamentals, as you just mentioned, don’t point to any help on the way for the may contract right now for the may contract, which is going off next week. But [inaudible] you know, for the June contract also. Yeah. So there’s nothing on the horizon for either may or June that you know, particularly that in the near term is going to change the, um, the essence, the supply and demand for a crude at, at Cushing more even the, you know, the Gulf coast is going to get full because, or close to full because all these long haul imports are going to be, are going to be arriving. All these, all these Saudi barrels which were sent and sent in March, you know, they’re arriving in, uh, they’re arriving in April and then into may and you know, they’re going to keep coming until, you know, in June they’ll, they’ll start a baiting. But, you know, we don’t need them. I mean, we obviously, we clearly do not need them. We’re already seeing a huge decline in, in crude runs and, um, you know, and we’re going to continue, you know, a crude runs and that gets, you know, we’ll talk about the product balances. We still haven’t reduced crude runs enough to balance the product markets. So, you know, what crude runs are basically a demand for crude. Uh, you know, they continue, they continue to go down. Yes. Sorry about that.
We saw a, a almost a million, was it almost a million barrel drop this week from the, a weekly numbers were at 12.6 point 12.7. Now.
Yeah. Uh, uh, crude runs have fallen off the table and it, it does not look as, you know, the, they’re not going to start coming back until June or July at the, at the, uh, at the earliest switches. Y you know, my, our numbers are look, look like, you know, it was still still seeing rising crude stocks, uh, right through, uh, June and into an possibly into, uh, into July. Uh, and that’s with production, you know, production declining pretty dramatically. You know what, see what the EIA has is the production is down from earlier in the year, 12.7 million barrels a day down to 11, eight, by the end of the second quarter. And then, you know, I think that’s certainly feasible. Could be lower than that.
Yeah. That is a, they’re running out of places too. There’s no demand. There’s no places to put it. We’ll start seeing ships in, in the Gulf, not offloading but trading the curve as long as then, yeah. Floating storage, right. Yeah. If you could find a shift and make the economics work. So, um, we’re, I guess the, the, we want to know when, what month does it turn around and we’re probably gonna get, uh, you know, it’s probably to get more information about what month is it going to stop? Uh, going down by listening to dr Fowchee rather than saying, well, the numbers right. He said, okay, to open up the economy, right. Well, gasoline demand is gasoline. It’s a real problem. Chimp, it’s a, it’s a real problem because we’re already, uh, nearing we’re, we’re 260, some odd billion barrels of, uh, of gasoline. And, uh, it looks to be like, you know, the government has two 73 is as the store as the, um, shelf storage number. I think it’s probably closer to two, eight to 82 85, I think by the end of may or into June. It’s possible we get there. Uh, which is again, you know, how do you cry? You can’t crank the crude runs up if you’re a gasoline storage is full.
Exports aren’t going to belly out.
Yeah. Exports are not going to bail you out whatsoever. The only, what’s gonna bail you out is that you reduce crude runs enough to at least try to balance the market, but then you build crude stocks. Right. So it’s, you know, it’s really a dilemma. It’s a, yeah, that’s a really tough dilemma for the refiners who are facing horrendous margins, horrendous margins as it is.
You know, I remember, uh, we were trying everybody, everybody was trying to get Exxon’s a future’s business and they, you know, they’d said they didn’t, they’d never hedged because they were internally hedge. They had all this refining, they had petrochemicals, they had oil production and natural gas production all around the world. And um, you know, so if, so, if oil prices were going down, their margins were going up, you know, if, if maybe a natural gas would be doing better than crude, but this time it’s, there’s, there’s no place to hide. It’s like your, your, all of your assets are correlated in there and they’re not doing so good. Nah, no way.
The, there’s no way out of the, at least the near term as we move forward, these production, those long haul barrels won’t be coming here that are there. The Saudis are focused on, on Asia, rightly so. So that production will decline. We’ll see what the Texas railroad commission decides that they’ve been under pressure to cut Texas production by a million barrels a day. You know, we’ll, we’ll see if that happens. But the market itself I think is gonna is going to take care of, you know, a lot of the, a lot of this, um, excess U S production given, given where the demand is right, you’d kind of want, I mean, that’s kinda what you want the market to, uh, do it’s do its work, you know, the higher cost producers stopped producing first. Yeah, yeah. Yup. Go ahead.
The, the, again, that could be by the end of the year, that could, that could be a million in it. You know, a million and a half barrels a day out of, uh, you know, out of, out of the U S balances and that, you know, that certainly will help, you know, and maybe it’ll be 2 million by, uh, you know, by first quarter.
Right. Uh, before we talk about the, uh, snapback potential, I just, let’s, let’s talk about products for a second. Um, you know, I was looking at the a weekly, uh, DOE numbers, uh, uh, stock levels. Uh, it’s a, it’s uh, on their site this week in petroleum. They get some really nice the charts there. And if you look at crude oil, obviously moving stock levels are moving sharply higher, not quite. Uh, they’re, they’re approaching the sort of the five year top of the range. Gasoline, however, has blown through, as you mentioned, it’s a problem blown through the top of the five year range, but a diesel, even though it was a hefty increase, a lot, this, this past week is still sitting at that bottom part of the, um, of the, of the, uh, star five year average range. But the prices are acting, you know, gasoline has been gaining on diesel recently. What’s, what’s going on there?
That is a excellent question because the gasoline crack has really as rallied, like has rally $10 this week from way negative or over the last couple of weeks. Of course it was negative. Right now it’s moved into, uh, into positive territory and, uh, it’s, it’s really unclear, unclear why unless, you know, the market’s telling us that, uh, refiners have cut back enough on gasoline or, or demand is not as bad as we think. Although I can’t imagine that that demand is, is any better than what the EIA is, uh, is reporting from. And again, we’re, we’re actually, we’re looking for gasoline stocks to continue to build. Now, diesel was a, was a bright light because trucking demand at least during March and into early April was pretty good. You know, diesel demand was, it was hanging in there and as a result, the, um, you know, the cracks, the diesel crack really was, was, was strong.
But now, yeah, every refiner that that possibly could is, is gonna try to run for a run for diesel. And you know, maybe the crack is the gasoline cracks reflecting that. Also we’re seeing diesel production was op this last week to a pretty high number. Uh, and, and it’s unclear given the, given how, uh, all these supply chains are completely broken. You know, how, how diesel demand is gonna continue to stay as strong as it was in March until, you know, until the economy opens up again. So, you know, we could see diesel going the other way. Jim could go, you know, we could start seeing diesel going, going South here is refiners run for a run for diesel. All right, good. So why don’t we move through the year and let’s talk about, you know, at some point we do open up the economy gradually when, when do you have this coming into balance?
The big problem is the imbalance in the second quarter. This is, uh, you know, the IEA had a spilling stocks, I think something like 15 million barrels a day in the second quarter. OPEC was less. And the IEA OPEC I think was only like 10 million barrels a bit. The day build, which is outrageous. I mean that’s an outrageous number, right? None of us have ever seen anything like that which would indicate, you know, every nook and cranny after the second quarter is going to be, is going to be filled. And I think that’s going to continue into early, the early third quarter. And then it looks as though if non-OPEC production continues to, continues to caught and we’re talking about reductions in Canada, Laura way, um, U S U S of course Brazil, it by the second half we’ll see non OPEC production really, really coming off and I don’t, I don’t OPEC production, they’re not going to make nine, nine, seven out of, out of OPEC.
I mean some of those, some of those production cuts, Nigeria, if they, if they can sell, they’ll sell a Saudi, I think what we’ll cut back. But uh, UAE, Kuwait also will cut back a rack. Then they’re not going to make their number either and less demand for their crude is, is you know, less liftings are off because the demand is so is so soft. But it looks to us as though in the third quarter figs get later in the third quarter, things get a little bit more into balance. And then we have a deficit in the fourth quarter. Ours is like two to 3 billion barrels a day. The IAS looking at 5 million barrels a day. And again, it’s all predicated on uh, how well, you know, how we, how the economy bounces back. Uh, and how, how demand bounces back. I have it not bouncing back that that’s strong. By fourth quarter. I think the IEA and OPEC OPEC definitely is, uh, is much more optimistic for, uh, for fourth quarter demand.
Yeah. And then you have all this, uh, stock overhang that you have to start liquidating. So yeah, let’s talk about that. So here we are, are, you know, stocks globally will be full. And this deficit, it’s 2 million, 3 billion browse that they will, we just built by 10 to 15 million barrels a day. So it’s going to take a long time to work off the, these, uh, the surplus. So it’s going to be, you know, it’s going to be into, might be into next year or you know, second half of next year before we get inventories back anywhere near normal.
Mmm. Yeah. You know, I was talking to you about this. Um, it’s different when you’re looking at the, uh, stock market where you’re buying a financial, like let’s say you’re buying a stock, some stock and it, you know, you’re, you’re looking at, you’re kind of discounting future earnings and in, in futures it’s, it’s different because you have a, it’s their, their contracts, you’re trading contracts and, and they go off the board. So you buy, you know, you buy Mae and all this good stuff from OPEC cutting back, can’t help may because it’s not going to kick until second half of the year where we get right bouts. Right. And so you have to be careful. You know what actually you buy in the, and you think about all the money that went into the U S oil, a stock that’s basically future’s rolling. They’re not only do they the market, the flat price come down, but now you have these steeply market and contango so you’re losing every time you roll, you’re losing, you’re losing money. So it’s just have to be careful on where, you know, if you’re bullish, what, how do you, uh, uh, you play this thing, right?
How do you describe your, uh, your bullishness the market, the market will recover. It’s just, you know, when, when and how, and I think it’s a long, you know, it’s a long slog till we, you know, till we get out of this. The good news, the longer term, it’s good. It’s good. And bad news obviously is, is a lot of, is we’re seeing cat capex just being crushed. Billy, you know, tens of billions of dollars is, I think it’s 65 billion. Maybe it’s more than that of a capital expenditures that won’t be, that won’t be made, which is going to lead ultimately to a, to a longer term, a longer term Polish market. It’s just when that cycle, you know, when that cycle begins.
Yeah, that’s a, that’s what we’re all trying to figure out here. I did see, I looked quickly through some of the options that traded yesterday as I did see a December $70 call. I think I didn’t check it too closely, but I was just looking for a kind of oddball, uh, things that we’re trading. So there’s a, I don’t know if you call him an optimist or a pessimist, but somebody who thinks that we’re going to see a, a big turnaround by the end of the year. Now at the November, those things go off in November. I saw some, uh, uh, June 20, 23, $41 calls and a DCE 20, 21, 39 50 calls. So, uh, some people were looking, um, you know, trying to take advantage and doing exactly what we’re, you know, he’s saying there’s a recovery coming when, and I dunno, you know, it looks like they’re trying to take advantage of that idea. Then what else? We saw some, uh, had some puts the traded that were, uh, kind of oddball, not oddball, but, um, yeah, the uh, June, 2021, a 30, 45 and $50 put. So that, that might be somebody taking, you know, producer looking at, uh, the curve, better prices in the, in the years out and just putting something on.
But, um, other than that, that the big open interest numbers in options are still the June and DCE 40, 45, 50, 55 puts in a June. Andy’s 50, 55, 60, 65 calls, the June 10, 15, and twenties are on the rise as you just haven’t been down here long enough for those to take up an open interest. So you will see, I, it’s just, it’s so odd. The volumes aren’t crazy. They’re, they, we uh, we did a big number on the down on March 9th. Oh, over 500,000, but most of the time it’s between one 50 and 200,000. And you know, that’s, those are good numbers but not not outs. You know, crazy numbers. We had a new vol record set on March 20th. The front month was up to one 88. A second muscle and I track was one 53. And um, yesterday, uh, we, we settled June saddle at one 12.
So, um, you know, we’re, we’re way off the highs, but it’s still over 100%. So everywhere you look in this market, the numbers are just crazy. I mean, it’s truly is an Oh my God market, which I have made fun of for a lot of years that people are going, Oh my God, when the market moves, I said, this is nothing. This is something, this is something, Oh, this is one for the books, books, lists, you know, at least I’ve been in this pretty much from the beginning of of crude actually. Even before that. I hate to say, well he knew all 1978 and you know, I didn’t start Saturday eight. Okay. I thought you were a close.
Yeah, this is definitely one for the books. Yeah. Uh, very good. What else? What else do you want to talk with them? One other thing I want to talk about and we brought this up is, um, is can the market go to go to zero? And we came pretty close on some of these, you know, some of the other crudes, Canadian crude came close. What physical gasoline came really close to going, uh, to going negative in Chicago in I think the end of the month or early the month, gasoline went for 16 cents. It’s one 6 cents. And I think at North Dakota today it was 14 cents. This is amazing. It’s almost as if you’re, you know, you get to the point where you’re paying somebody to just take it away. I thought you were going to say it’s almost like a, what was it, oil city when the oil was first discovered, is that I can’t read the trake well, as a matter of fact that the 1860s, uh, oil did go, it did go negative.
People did pay to take it. There was no storage and uh, producers paid to get to get it out. I think they said you can keep the barrels. Yeah, you can keep the barrels. Right. Yeah. Very good. Yeah. So, um, okay, well we have, uh, we had our special a podcast a couple of weeks ago with a B from, and he’s talking about what, what the hedgers are doing. So, um, if you hadn’t listened to that, that’s still timely and it’s got a good approach to risk. And he talks to, uh, all different kinds of, uh, participants in the oil industry on a regular basis. And um, so it was good to get his insights and a w, I mean, we’re probably going to do another podcast in another month and a lot sooner. Sooner, maybe soon, maybe two weeks. Yes. There is. Try to get some guests on as well. And I’m still putting my, uh, favorite, uh, articles in, and my, sometimes I’m not too snarky, I have to say a more snarky and person than I am on the blog, but there’s, there’s stuff going up on the blog on a regular basis. Um, and that’s that, uh, commodity research group.com.
Anything else, Andy?
No, I think we covered a lot and certainly a lot to cover.
Sounds good. Okay. So we’ll catch you next time. This is a Commodity Research Group.com.