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
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
James Colburn
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.
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Transcription
Good morning.
This is Jim Colburn of Commodity Research Group. I’m here with Andy LeBow, also of Commodity Research Group. And we’re here to talk about energy markets.
To learn more about us, you can check out our website at www.commodityresearchgroup.com where we post our podcasts and blog.
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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 specific 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 Wednesday, April 17th, a little after 11 a.m., and Andy, I’m sure that there’s a lot going on. I’ll give you a choice of where to start.
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Good morning, Jim Colbert. We, uh, we’ve had a little activity in the oil markets, but maybe not where you might expect. Why don’t we start off with, uh, you know, just talking about what happened over the weekend from maybe, uh, perspective of price action. Okay, well, let’s talk about what happened on, uh, the most recent Friday here, which I guess would have been April 12th and, uh, there the, um, trading community was. Was presented with a number of headlines coming from all over the wires and all over social media, and everything else about Iran’s attack on Israel was imminent, and that the US was warning Israel that this this attack could, um, come and come at any moment. The Israelis, you know, obviously went into a defensive mode, but what the market did, it also went into a defensive mode, saying that the market went into a defensive mode with short covering and, uh, maybe some fresh buying that took us up to the highs of, um, you know, nearly 88 basis WTI, uh, high six month highs, as we all know now, the um, Iranian attack on Israel was um. Deflected, uh, some great defense by the Israelis, the Jordanians and, uh, the US. And, uh, luckily there was no there was no damage. I think, uh, the attack had been certainly, you know, well, well advertised, but nevertheless end on Monday and into this week, we’ve seen the market come off, uh, pretty broadly from, uh, those highs back into the mid 80s. I think it’s like 8450 as we, as we speak. So if there was a sea of tranquility in this market, I mean, you know, I’m an options guy. I think I saw in the flat price. I mean, we kind of for, for, uh, you know, um, a raising of tensions as a major, uh, bombing would do. Uh, the price basically moved relatively sideways after a run up. I mean, it has hasn’t come down sharply, but it’s really, um, when we look at this from an options perspective, um, we see that the implied volatility is running around 30%, which is, you know, below average of a average. Give it give the average around 33% long terme. There is a premium in that though, because the actual historical volatility 20 day is 16% and that’s an extremely low, uh, number for, for oil. So so you’re talking about maybe a, a 14 point difference between implied and historical. And those things can be all over the place at times. But that’s that’s still pretty wide. We also saw this. Increase in tension. Where we really saw it was it showed up in the options skew. The options skew is the difference between an out of the money call volatility and an out of the money put volatility. You know it’s the implied volatility is the number we get. You know, we back into it from the Black-Scholes model or like the Black-Scholes model. And when you’re trading options on the same future, theoretically they should all be trading at the same implied volatility because they’re both priced off the same futures contract. However, in real life, the the the tendency in oil is for puts to trade over call. So that would indicate a you know oil producers buying puts more than oil end users buying calls. So so basically the the paper flow or the order flow tends to be put by our call seller. Uh, so you get this normal skew of put volatility over call. So it flipped and and so we went from you know maybe minus four where, where uh, you know, if I say the call out of the money call volatility versus out of money put volatility is minus four. That means puts or four points over the calls. So it went from minus four to around plus 12 where it is now. So that’s so even though the prices were moving relatively you know ranges were were you know modest going into this thing and coming out of it that, that was, uh, an indication that something serious is going on in the, in the option world. So the other thing was that we would expect to see heavy call volume, and we did see that we even the day the day after Monday, we saw over 500,000. Uh, Brant and WTI calls trade most mostly volumes and Brant these days. And that’s what you would expect. Open interest was up. However, what you saw on Monday was was also position moving around. So some of the some of the uh, options were showing a decline in open interest and some were showing an increase in a lot of spreads were being done. So that was like positioning, repositioning. And there’s outright call buying as well. So even though the price movement might tell you that, you know, tensions have abated in the option market. Uh, when we look at Monday and yesterday’s, uh, activity, this market has still got major worry in it. So if I could look at some of the trades from yesterday in WTI, we started seeing we haven’t we haven’t seen these in a while. But the $1 wide call spreads trading in size. So the so the Sep 100 101 were trading in size uh 10,000 lots each. And you’d see an accompanying uh open interest move of about the same uh, new meaning, new positions. Sep. 93.5, 94.5 bunch of those traded. And, uh, and we did see some DS 150 calls trade. So. So you’re seeing these upside calls trading and, um, you know, it’s probably, uh, sort of, um, protection against or maybe it’s a speculator looking for, uh, increased like a retaliation from Israel for this, uh, war to, uh, escalate. Um, however, we did see, um, a bunch of June 90th calls, trade and open interest actually went down in those. So that’s kind of like a role, you know, some people getting out, some people getting in. So that’s, you know, again, I probably the surprise to me was that maybe implied Vol didn’t go up higher. It everything that happened in options would be expected given what was given the imminent, you know, uh, bombing that that was widely reported, as you said, higher, higher call lots of call volume trading vols move up in the skew flips to from negative to positive. So no real news there. The only thing that I was surprised is that we didn’t see implied vol go up higher. I mean, during uh, the Ukrainian uh, invasion, Vols got up to 80. Uh, you did have an accompanying, uh, price move with that. Uh, this time we get no price move. And again, I’d point to the 20 day historical of around 16% that kept the increase in vol muted. And having said that, we we were at a low of around 23.5% late March, which was probably overdone anyway. But, um, you know, we were, you know, all year we’ve been talking about a balanced, uh, oil market. And so it’s hard to generate, uh, volatility when, when, uh, supply demand are in balance. So 30%. Well, while looking at long tum average doesn’t look high when you compare it to where we were 23.5 or the 20 day historical. It’s got a premium built in there. Uh, well, I think the, um, you know, the late March lows, it was April 1st that, uh, Israel bombed the Syrian embassy and killed the Iranian general. So I think that, you know, that was the event that, uh, that got foul going. But I agree with you. I mean, 30% foul is is relatively low. Um, given some of the stakes that right could happen. Yes. But, you know, alternatively, the market’s been living with, you know, some type of threat for, uh, a supply cut off since, um, since Russia invaded Ukraine. So it’s been, you know, which was in, uh, 20, 22, um, and of course, in 2022, we, we did see we saw we saw a lot of dislocation. We did see some supplies reduced. But by the end of 2022, the, um, you know, the market had normalized somewhat. Yeah, I was wondering, you know, if we’re talking about Iranian sanctions or sanctions on Iranian oil exports, you know, maybe which is a possibility, is maybe the market saying, okay, well, we have sanctions on Russian oil and it’s still making it to the market. And and the other thing is, you know, you hate to say it’s an election year. And the worst thing that the current president needs is a spike in oil and gas prices. I mean, so maybe they’re trying to work on Israel’s response rather than slapping on, uh, sanctions. The oil experts. What do you think about that? Well, I think I think that’s right. The a lot of the. Information coming out of all the usual think tanks, the usual suspects are that we’re really not going to enforce sanctions on. I mean, the sanctions exist. We’re not really enforcing them. You know, they could take them, they could tighten them further. Right. Um, and but I think it’ll it’ll move more towards, um, enforcement, uh, rather than tightening. Although Janet Yellen was talking about the potential for, uh, for more sanctions. But I happen to agree with you, I think the administration doesn’t want to see, uh, gasoline prices get, uh, get out of control. They have rallied significantly there as we speak. They’re around 364, which is around where they were last year, actually, at this time. And, uh, last year, retail gasoline prices for regular in the US, you know, they got up into the three 80s during the summer and then came off, I think, um, you know, certainly the administration doesn’t want to see a for, you know, an average handle nationwide of four. I mean, California, they’re, they’re well above that. But, you know, it’s it seems like the $4 level is something that they want to they want to try to avoid. Not that they want not that they want to see it go, you know, higher than here. But, you know, three six in the three 6370s, I think the American consumer can, uh, can handle that. And I don’t think there’ll be that much political blowback. Right. It’s it’s really interesting. You know, Andy, you were when you first got into analyzing oil markets. I was in diapers. Um, well, not not quite, but but but you I mean, you were one of the earliest ones because you picked up on the, uh, the heating oil contract and, you know. Yeah. That’s right. Right. So you have been doing this for a long time. And when you first came into this thing, you know, a big driver of oil prices was, was, uh, figuring out what Saudi policy was going to be. And this many years later, when we look at all the the stuff going on in the Middle East and we look at, you know, supply, demand and all the politics, you know, what does it what does it get down to again? It gets down to the same thing. Same thing. What are the Saudis? What are the Saudis going to do? Because they are, you know, they are the swing producer. Uh, a lot of people have talked about the US becoming the swing producer, but we’re not because we our policy more or less is, is driven by a number of independent producers, not in the, you know, independent majors or mini majors or whatever you want to call them. You know, we don’t have an oil policy that’s going to cut, uh, output like the Saudis do cut and increase output. Uh, nor do we have the spare capacity that the Saudis do. So you know what? What? What they decide to do coming up, and we’ll talk about that. You know, it’s going to be is going to be a critical determinant for price. And yeah, it really is remarkable through all these decades that, you know, they still they still have inordinate power over the the price of crude. As much as as many observers have said, oh, no, you know, the Saudis don’t run the market anymore. Well, they do, right. And, uh, let’s um, we the other thing that’s gone on in the last few weeks or last week or so, is that the big three, uh, oil reports have come out, the monthly oil reports, reports and, um, I think, uh, a couple of them suggest that, uh, uh, OPEC is going to keep. Production, where it is to the end of the year and then release some oil. Now that that’s their assumptions and their, you know, their base case. But why don’t we talk about those three reports that came out? And, um, is there anything that stands out to you that you want to lead off with them that IEA, EIA or OPEC reports? Yeah, what stands out to me is that in the second half of the year, all for all the reports, the call on OPEC crude is higher than their current production. And what does that mean. That means that in order to prevent inventories from drawing further and tightening up the market further, uh, we’re going to need more barrels from uh, from OPEC and OPEC and OPEC plus. In fact, if you look at, well, if you look at the, um. Well, let’s look at the IEA. Well, the the IEA is um, saying the call on OPEC crude, for instance, is 27.3 million barrels a day. And in the third quarter and they’re producing 26.5 million barrels a day. Uh, in the fourth quarter, they’re looking at a call of 28.3. So you’re, you know, again, that’s a big draw OPEC itself. And this is interesting. They have unbelievably strong demand this year. They’re looking for demand to be up 2.2 million barrels a day which is I don’t know I mean I’m the we’ll talk about the crazy numbers but uh OPEC. You know, that’s a that’s a huge amount. The IEA is like up 1.3 and the IEA is up one. So really not you know OPEC is talking their book to a certain extent obviously. But their call on OPEC crude. They is they’ve got drawers. If there’s no OPEC increase OPEC plus increase. They’ve got drawers of 1.6 in the third quarter and 1.3 million barrels a day in the fourth quarter. So I mean those are those are big numbers. And you know, look where you we look where inventories are now. You know, they’re not they’re not high. They’re they’re below average. I think what’s uh, if you look at inventories on land inventories according to the IEA, are are low. Um, they’re as low as they’ve been since 2016 to counterbalance that on water inventories are high. So one has to presume that, you know, we’ll see that those waterborne barrels unload and, uh, you know, that that may lessen the tightness on, um, on land inventories. So here we are. We’ve got low inventories, and we have a chance for pretty healthy draws in the second half of the year. We’re looking for. We’ve got a call on OPEC crude of 27.3 million barrels a day and 27 four in the fourth quarter, so let’s say 27 for again, in order to balance stocks, you know, we’re going to need an extra 700 to 800,000 a day just to keep, you know, keep stocks level. And the question is, you know, are we going to are we going to get that. And our numbers at CRG, we’ve got demand up 1.3 million barrels a day. It could be higher than that actually, uh, if you look at, you know, some of the IMF yesterday increased their, their call for GDP. Jim, you were talking about what the Atlantic global GDP, Jim, you were talking about what the Atlantic Fed was saying. Yes. Uh, Atlanta Fed uh, is up to 2.9% for the first quarter GDP. And that’s um, you know, it’s up. It’s been that’s very strong basically for, for this economy and yeah, for us. Yeah. For the US. For the US. Yes. And so, so the, the, the economists and the US have continually lowballed their I mean, their numbers are just lower. And the sort of the Atlanta Fed is, is data driven. No. You know, there’s no opinions in there except when they make the model. But um, they’ve been consistently over the, the, uh, economists consensus. And in the Atlanta Fed’s been right, uh, at least recently. I don’t know about long time, but, uh, anyway, there’s good growth in the world. So you’re going to get you could get more demand than you expect than, than what’s built into this. Uh, yeah. Right. So yeah. So what does that what does that translate to in a price? And I see the, uh, it was the let’s talk about let’s let let’s get back to the Saudis now. Okay. So where are we getting where where are we going to get. Let’s say let’s be conservative and say it’s half 1 million to 1 million barrels a day in the second half of the year. You know who’s got the spare capacity? Well guess what. You know it’s Saudi. Mhm. Um, you know Russia, Russia will have some I think their production you know it’s hard to say but it looks like their production may be down some in the, in the second quarter because of the attacks, the drone attacks on their refinery capacity. They, they have trouble with uh, you know, they have some tightness on, uh, crude storage. So they probably have had to cut production. But nevertheless, most of the spare capacity is held by Saudi. So we have a June 1st OPEC meeting. Uh, that’s going to be a barn burner because it’s a question of, you know what, what price what’s the price going to be. Because clearly if and this is assuming no supply cut off from the from the Middle East, you know how. How anxious will the Saudis be? You know, what price do they want? You know, I think if there’s no increase prices, I think prices could go. You know, WTI has a chance to go into the mid 90s maybe, maybe, uh, maybe 100 if if they do increase and how they increase, you know maybe, maybe the market gets down under 80, you know, and settles down, you know, settles down some. So do you Andy. Sorry. Finish. Go ahead. Finish. Oh go ahead I was going to ask you if you have a, uh, like a risk premium built into your price. Uh, you just laid me up. Yeah. Let’s talk about let’s talk about that risk premium. You know, I just hit a button for people who are listening. Um, yeah, you just did. All right. Do I have a risk premium to the. Well, you know, yeah, there’s a little risk premium, but as, uh, you know, as you and I have been talking about, we see often in the press some of, um, you know, some other analysts and traders and, uh, market observers throw numbers out like, oh, yeah, this is 7 to $10 risk premium in the market, you know. And I’m always amazed okay. That means that, you know, the equilibrium price because the risk premium is over the equilibrium price. So you know, how is how can you possibly quantify no one really you know, people are have been in search of the equilibrium price probably since, you know, oil was discovered in Pennsylvania in the mid 19th century. Um, so, you know, if you’ve got a. You know it. If you know the equilibrium price and you want to add some numbers on, that’s nice. But yes, I don’t I don’t know how you can do that. I think the, uh, financial equivalent is our star. Whether that interest rate. Yeah. Does not non-inflationary, but, uh, you know, keeps it, keeps unemployment down. It’s it’s, um, what the fed is supposed to be searching for. But, yeah, it’s unknowable. Basically. It’s unknowable. Now, the market can trade. You know, we’ve seen over our careers, obviously, that the market trades in a relatively narrow range. And at that point you could say, all right, you know, this range somewhere around this range is for a long time trades in a narrow range for a long time. Right. Um, there were years during our career where it traded at like a $4 range, which is, you know, like incomprehensible to traders now, but, you know, go take out a chart in the 80s and 90s and you’ll see years. Well, I remember doing option classes where my, all of my examples were based on $18. And in order to change, you know, to keep it current, I’d have to, you know, change a lot. But I kept it at 18 for a long, long time and then, uh, eventually had to bump it up to, I think I didn’t bump it up to like 50. And if I, if I was doing it today, I would probably put it around 75. So yeah. Yeah, yeah. But the interesting. Well I think the ten year average for WTI is 65. So the last ten years. So is that the equilibrium price. Yeah okay I don’t know. Well you know I pressed your button. One of my buttons to press is uh the mean reversion strategies I think that’s you know it’s it’s basically in my mind it’s a short vol trade which is, uh, doomed. You know, it’s it’s the old idea of picking up, uh, nickels and dimes ahead of the steamroller. And someday you’re going to trip and get run over. So. Yeah. We have our we’ve been have we been doing this too long? Are we really those two guys in the balcony of the. We might be, but I think we also have some good you know, we do have the benefit of experience. Right. And um, right. You know, just just yeah, there’s a risk premium in embedded in the price, that’s for sure. But you know, I, I what the dollar number is to me is, you know, just like you said, it’s unknowable. Well, I have to say, Andy, since we’re, you know, uh, files are dumping in my head right now because we mentioned some keywords, but I’m just going to throw this out there. You know, I’ve done some, uh, guest lecturing at some of the top business schools on commodity markets and options and things like that. And I met with a bunch of students for one of the, uh, these top schools afterwards. And I was asked, you know, what’s you said? The guy said, you’ve been around this business a long time. He said, what’s the common thread of, uh, you know, trading situations that blow up? And I, I just blurted out and I said, well, it seems to me it’s a high concentration of MBAs and PhDs from Ivy League institutions. And, uh, so, yeah, we all have our biases, I guess. But anyway, back to back to our story of, uh, back to our story. Um, so, um, so back to, you know, when you when you talk about the call on OPEC in the, the IEA talked about the end of, I mean, 20 in 2025, they said the OPEC plus call is going to be down 300,000. And they threw out a number of, um, effective, uh, spare capacity at 6 million barrels, which would be the largest ever. Now that’s. Listen, you can’t it’s really hard for anybody to look out 2025. But that’s I mean is that to me that says we got a price war ahead of us. It’s it’s certainly possible. I, I, I question the 6 million barrels and I’m not exactly sure where they’re, you know, where they’re getting that, you know, I guess they. Uh, you know Iran? Yeah. Yeah. This spare capacity, you know, Iran, Venezuela, maybe. Uh, Iraq certainly has some UAE, little Kuwait. Most of it is in, uh, Saudi. There’s spare capacity, and then there’s the spare capacity that can actually come to market pretty quickly. And the ones that are politically challenged obviously can’t. So I don’t know about the 6 million. But nevertheless, yeah, 25 right now is looking a lot more bearish than, um, you know, than 24. We see that in the you know, we do see that in the price. Although I would say that, you know, one would think if production is going to increase in the second half then we should start seeing the. And that’s that of course is. And I’m not you know, we don’t know. But you would think that the curve would kind of flatten out. Um, and it has I mean, if you look at like I was just looking at July, for instance, on, on WTI and, uh, you know, that that’s come off from I think it’s like 45 or $0.50 a month, down to $0.30 a month, but it’s still backwardated. Right. Um, you know, and um, because the market doesn’t know either, you know, there’s, there’s a tremendous amount of uncertainty coming up, not only about geopolitical, but clearly about the actual supply demand. You know, we’ve. Yeah. Uh, can we is this a good time to talk about gas to diesel values? Because, I mean, gasoline seems to be it’s always a good time to talk about the Widowmaker. Yeah, yeah. Well, it’s, you know, you keep I keep reading about how gasoline we’re going to see, like, a decline in demand and gasoline first because of, you know, efficiencies and cars, hybrids, EV sales. And yet gasoline prices are doing pretty well relative to the rest of the complex. Right? Some of that is, you know, I think that might be more supply driven than than demand driven demand has been it’s been all right. You know, it’s it’s probably running plus or -50,000 a day over last year. Uh, we’ll see when the final figures are in us. I’m talking about um, uh, but on the supply side, uh, we did have a very heavy maintenance period, which is now coming to an end. Uh, we also had a number of refinery issues over the, over the winter on freeze outs and operational issues, and we’re still having them. So we really haven’t seen gasoline yields get to where they should be this time of year. They’re still running a little bit light. And as a result we’ve seen you know stocks come off pretty. The gasoline stocks come off pretty good. Padd one stocks are definitely low. Uh we’re seeing that in the cracks. You know, the cracks have actually I thought the cracks were going to come off pretty hard as we, uh, maximize the gasoline output after turnarounds. But we’re we’re probably a week, a couple of weeks away from that. I don’t think gasoline is going to. You know, I do think the cracks are going to come off. I think for gasoline prices to really explode, it’s going to have to be crude lead. Um, and you know, I again watching the yields now looking at Europe, the you know Russia’s had refinery issues. But you know, their gasoline exports are only down or down less than 100,000 barrels a day. So that’s that hasn’t been all that big of a deal. And Europe has been exporting inventories as I said, have have declined in in Europe. But you know, alternatively, in the Gulf Coast, the US Gulf Coast gasoline is is running well below, uh, where it is here, I think it’s 12, 13, $0.14 under where it is in, uh, in New York Harbor. So or on the, on the screen. I’m sorry. So I think it’s probably, you know, these, these crack rallies, you know, is a little more supply oriented and, uh, some slightly more regionally. Oriented. And as I said, as we see Ronstadt, as we see runs and yields maximizing, I don’t think demand is going to be strong enough to to you know, I don’t think we’re going to see any shortfall here whatsoever. Uh, Andy, it’s, uh, traditional to look at stock levels compared to the five year average, but the five year average still includes the Covid. Stocks. Yeah. We biasing is is it everything looking a little tighter because we’re comparing it to a five year average or crude actually looks. Well you know what I have to tell you something. I took out the five I took out Covid. They’re so ridiculous. The numbers are so off. Right. Uh, that I just I just threw them out. Crude looks around. Crude actually looks around normal. Uh, maybe a little tighter than, uh, maybe a half day to a day. Supply below average diesel looks near normal. Uh, gasoline slightly below normal, but nothing. You know, if you throw out the Covid year and just use, say, four year averages, you know, 19, 19, 21, 22, 23, you know, there’s nothing there’s nothing really untoward, um, in any of these, in any of these numbers, you know, including totals, total stocks. So. Yeah, maybe. Maybe we are at equilibrium. Well, let me just talk. Let me just talk a little bit about diesel. Yes. Of course. Um, I think the one thing that that is really globally. Our refinery margins in the US are pretty good, and in Europe they’re pretty good. They’re not awesome, but they’re, you know, they’re good enough. Uh, Asia is not. I mean, Asia, the refinery margins are, um, you know, mediocre to to poor. Diesel’s been a diesel’s been a problem in, uh, Europe. The Chinese runs have been Chinese. China’s runs have been pretty strong. And, uh, their exports have been high. And, um, you know, it’s definitely led to some softness in, um, you know, some softness on the, um, on the Asian markets. Maybe that’ll tighten up because they’re, they’re doing they’re going into turnarounds right now. You know, April, May, June is when the Asian refiners take turnaround. So maybe that’ll that’ll tighten up. But that’s something to to watch. And China in itself is interesting on diesel because. You know, their emphasis has now been on manufacturing and manufacturing leads to higher use of diesel just to take the product away from the factory and then, you know, export it. However, I think what’s counterbalancing that is that another big demand for diesel is is on building. Right? Right is, you know, when you. Yeah. Um, so when you build, you know, and you’re. When you’re building a apartment, houses, you know, you transporting goods to to the, uh, you know, to the complexes. And that, of course, as we know, is in a, you know, in a nosedive. So, you know, net net, it isn’t it doesn’t look like Chinese diesel demand is really been growing up as much as it should is, you know, and a lot of that, I think is probably because of the property sector really being in a I think it’s in a depression there. It’s interesting. Uh, the IEA has um, shows China, if you take the world oil demand, uh, 79% of the growth in 2023 was China. And they they expect 45% of the growth in 2024 to be China, and then only 27% in 2025. So it’s kind of you know, China’s slowing down as the the driver of, uh, oil demand still strong relative to I mean, 27% still a big share. But but I guess India is coming on. Yeah, India is coming out. I will say this about the IEA’s China demand. Um, they came up with a huge number last year for Chinese demand. So I, you know, I don’t know I and also last year’s growth you had comps because 2022 you know they were still in Covid lockdown right. Right. So I don’t yeah I don’t know I mean I think Chinese demand where the CRG numbers. We’re we’re actually close to the IEA. I think we’ve got like 350 to 400 Chinese. I thought maybe it could be a little bit higher. And most a lot of that’s jet, you know, because they’re um, you know, they’re beginning to they’re traveling. Right, right. I’m just picking some things here. Um, when we look at non OPEC plus production growth, it’s become like a throwaway phrase. It’s us Canada Brazil Guyana right. That’s right, that’s right. Right. So I mean they’re looking for that’s what it is 1.2 increase in 2024. Uh up 1 in 2025. Um do you, do you like the US production numbers that you’ve seen from these, uh, big three? Well, yeah, yeah. The numbers have been so far this year. Sort of been. Well, January was way down because of the freeze outs. Right. So you know that’s going to put a drag on year to year growth I think the if I’m not mistaken the EIA has. We’re at 13 one. I think they have crewed up to 13 five by December, by November and December, which is you know, I think that’s certainly doable. Mhm. Um, you know, we’re not going to grow as fast as, as we did last year. But again last year we had some you know, you’re getting the comps for uh 2022. But I think the messages were still growing. And I think we’re going to continue to grow and maybe at a more rapid pace in 25. Uh, depending on where, you know, prices end out, prices end out this year. And you also have, you know, as I’ve argued. You know, getting Exxon and Chevron. But you know, Exxon buying Pioneer and Chevron buying Hess, that’s going to make things even more efficient. And the difference between Exxon and Chevron producing relative to an independent producer producing is Exxon has great, you know, they have access to capital and at a at a much cheaper rate. So I think as we, you know, as they start consolidating those companies, I think we’re going to see those majors really crank it out in in 25 and into 26. So so basically you’re saying their their cost of production goes down relative to their previous entity. Yeah. It was producing. Yeah. Or any of the independents you know. Right. So I would think I think 25 yeah there’s a lot of bearish sentiment for 25. For 25. Yeah. Yeah for 25. So um let’s let’s talk about we, we’ve, we talked about uh prices. But let’s kind of summarize it. So you, you think we, we tighten up as the year unfolds. Um, things get are more likely to tighten up than loosen up. And yeah, prices. We’ve had a little run up already, but you can see another run up into the mid 90s and maybe possibly 100 bucks basis WTI. Yeah. If there’s no increase whatsoever. You know the Saudis play hardball. Yeah I think there’s a I think there’s a chance into the 90s 100 that could be a tough that could be a tough nut. But yeah I could, I could I could see that. So um, you’re the big event. So so you think June, June 1st is a much more important meeting or is it relative? Yeah. June 1st is the whole June ones, the whole thing. And I think in May we’re, you know, besides, let’s certainly there’s a geopolitical environment that, that we’re in and, um, you know, my, my comments or my predictions aren’t, you know, assuming those supply cut off from, from the Middle East because that changes that. That’ll change everything. But yeah obviously. Right. But June 1st. Yeah that’s going to be that’s the big meeting. That’s when they’re going to be talking about, you know, what they’re doing for this for the uh, for the second half or at least for the third quarter. And, um, you know, the way I think the way the market’s trading, I think it kind of expects at least a small increase, you know, that that it’s going to be a. You know, a gradual a gradual unwind. Right? Right. And we’ll, um, we’ll continue to like when you have Iran. You know, firing missiles into Israel. That’s got to keep. I mean, I hate to use a risk preview, but it’s got to it’s got to keep you a little bit leery of selling this market aggressively. Right. So you may not get people coming, coming in, you know, to shore like speculators might back off and say, you know what, I need to hire or I’m just not going to sell this market. Or if I do it, I’m going to buy puts or something like that. But. Right. Um, so that that may cause a little sort of drifting up as well where you just, you know, don’t have. You have less people willing to sell this market. In general. What else do you want to talk about, Andy? We’re kind of getting close to the end. Yeah, I think we’re. I think we’re getting close. Yeah, I mean, it’s. Which would you rather be, a refiner or a producer right now? I would rather be a producer right now because there is, you know, there is, uh, and we talked about this. There is going to be new refinery capacity coming onto the market. So, um, yeah, I think even even in a growing demand, I think I’d rather be a, uh, I’d rather be a producer. Okay. Um, and the last thing. Of course. You know, we also have the administration has to make a decision on Venezuelan sanctions. And that’s coming up Thursday, today’s Wednesday. Uh, so we’ll see. My guess is that they try to, uh, punt a little bit, you know, rather than do a hard sanction right now. You know, they punt as long as they can. Uh, you know, delay it probably to probably was the election November. Oh, ours are theirs. Yeah. Yeah. Well, theirs is coming up in July. July. So they may they may punt it till then, but we. Yeah. And that’s, that’s the other thing to watch is going to be the sweet sour differentials. Uh, the heavy crudes have been gaining because there’s the Mexican uh export crude exports have been lower because their refinery capacity is increasing. And then, you know, then is produces a heavy, a heavy crude. So that could that could help Canadian producers. And we’ve got that new pipeline coming up. There’s a lot going on. Yeah I mean there’s a lot of infrastructure stuff going on too. Right. And we we thought we intend to focus where the headlines are even, even as, but in the background there’s a tremendous amount going on. And then we haven’t even mentioned the energy transition, which is, you know, it grabs every headline beside not every headline, but. Well, it’s, you know, before we go. Uh, the IEA did say, uh, the OECD oil demand is expected to be down 60,000 barrels a day in 2024 and the same amount in 2025. So, I mean, it’s possible. Would you call that peak oil demand in OECD? Possible. Possible, right? Definitely possible. You know, at the same time, there’s heavy vehicles, are slumping. Volkswagen just had a terrible report on its, uh, EV sales. And and we know that Tesla sales were down, uh, significantly in the, in the first quarter. So there’s definitely a, um, you know, some pushback coming from the consumer on, uh, price. Yeah. Um, I think I, you know, I really have owning a hybrid. I think I just think that’s a better, easier sale for most people. It’s, you know, you know, I don’t I just don’t feel comfortable being 100% dependent on the grid. Like, if I if for whatever reason, I have to get the heck out of my house, I don’t want to. Yeah, I, I know what uh, the hybrids have. Their sales are booming. Yeah, they’re just doing great. They they took a lot of they took a lot of. It was a lot of negativity on their investment in hybrid. And they you know, they’re killing it right now. Yeah. They made some kind of calculation that if we’re going to have a shortage of these EV metals, um, we’re going to get more bang for our buck through, um, hybrids than through EVs. So I think I think that CEO is gone now. I’m not sure, but, um, it seems like he may have been, uh, onto something there. And. Yeah, I mean, that’s I’m not we don’t get you and I don’t get paid by Toyota, but I have a Toyota hybrid, and it’s, um, you know, my we love it. So. Yeah. Less less gasoline. And, uh, like I said, not 100% not. Yeah. It’s not a plug in. It’s not a plug in hybrid. So not a plug in. Right. You don’t have to depend on the grid. Okay. So, um, covered a lot of ground, Andy, let’s call it. So I’m, I’m, I’m looking for slightly higher. I’m going to be focused in on the June 1st meeting, and I’m going to look for some, uh, sideways to moving higher prices, even if there isn’t, even if the escalation in the, uh, Middle East cools off, if that’s possible. Yeah. Yeah, I think that I think that’s you know, we’ll, we’ll may is going to be filled with trial balloons from uh, OPEC plus. But as we said earlier, the podcast. It’s good to depend on where the Saudis want to go with this. Yeah. It was you know,
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Thank you very much, Andy.
Do you want to tell people how they can get in touch with you?
Yes. You can reach me, uh, at alebow@commodityresearchgroup.com, and or through our website, Commodity Research Group and LinkedIn.
Yeah I do more stuff on LinkedIn these days. So if anybody’s interested, connect with me on LinkedIn and I post some articles or things that I like.
The podcast will be up probably by later today or tomorrow.
All right. Till next month, Andy.
Till next month.
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