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, Andrew Lebow and Jim Colburn discuss the latest economic trends and supply and demand factors affecting oil prices.
About the Experts
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.
Speaker 1: (00:03)
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 along with Ed Meir. Andy and I founded commodity research group, which consults on various aspects of commodity markets. Check out our website, commodity research group.com where we post our blog and our podcast. We also like to thank our good friend Doug Stetzer of EKT interactive oil and gas training for hosting this podcast. You can check out his daily newsletter, podcast and learning email@example.com as a disclaimer, this podcast should be construed as market commentary, merely observing economic, political, and market conditions and is not intended to refer to any particular trading system. We are not responsible for any trading decisions taken by anyone, not intended to listen. Information is not guaranteed accurate. This is not an offer to buy or sell any derivative. Today is December 11th. Good morning, Andy. Good morning and we’re going to talk about, uh, first let’s wrap up the OPEC accord. Um, why don’t you just take us through, uh, what happens, uh, what the market was expecting and maybe what we think for going forward?
Speaker 2: (01:34)
Well, I think that, uh, it’s been 10 days since they came up with the agreement and the markets, uh, digested what a, I thought it was a, a good agreement. Uh, OPEC had given guidance to the market that they were looking at extending the production deal with non OPEC producers from a, the end of March on to either six or nine months seem to be the uncertainty. The market was looking for nine month extension and a, that’s what they came up with. Um, and I think the market was, was satisfied with that accord. They also left day, uh, June opener a or June options, uh, for, uh, reviewing the accord for the second half. And just today the UAE minister said they will, they will have, uh, something hard and fast on how they’re going to end the agreement, how they’ll, um, get a, get out of the agreement in either second half, 18 or more likely into a 19. So I think all in all, um, you know, we’ll pick, gave the mark OPEC and non OPEC, uh, gave the market what it was looking for and the market has definitely studied up, uh, since the agreement.
Speaker 1: (02:57)
I get this, it like they hired Janet Yellen. I mean, they sound just like the Fed giving, uh, giving guidance and, and, um, you know, laying out where they’re headed in the future. Um, what, what do you see, um, I’m thinking about Venezuela, Nigeria, Libya, Iraq. I mean, what do these, there’s been some of the, um, uh, you know, maybe Venezuela has been helping me OPEC accord, but, um, Nigeria, Libya, uh, they’d be working against it. Can you talk about those four countries?
Speaker 2: (03:26)
Yeah, sure. Well, going forward, the other thing that I think the Marco was happy about was that Nigeria and Libya were given numbers, two, um, numbers to produce within the 2.8 million barrels a day, which was around where they are right now. And, uh, going forward, uh, it’s not clear how much higher, uh, either one of those, those two combined are going to be able to, uh, going to be able to produce. So, um, you know, I, I would think guerrea they are going, they continue to have problems in the south, uh, with the, with the delta ventures, um, that’s not completely resolved. And Olivia has technical issues around in Iraq, uh, Iraq may be able to, they too have had geopolitical issues in, in the north, uh, with the Kurds. So it’s not clear how much higher the, that they’re going to be able to produce going into 18.
Speaker 2: (04:29)
You know, I would expect that they will get the 300 that they’re down or the net 150 that they’re down. Um, they’ll probably be able to increase back to where they were this year. But in terms of growth, um, I don’t see that much. You know, may maybe another hundred a day at best and a ran to, uh, again, maybe 50 to a hundred, a hundred a day. But, uh, obviously those, those two producers a, that they’re under some geopolitical constraints and certainly chimp, we’ll be talking about a ran going into 2018 as, uh, we know the steel is going to the, the nuclear deal. We’ll almost certainly, um, bubble up into, uh, into 2018
Speaker 1: (05:15)
in Venezuela. I’m sorry. Uh, do you see them declining, whether they’re down a little bit down some this year? He s
Speaker 2: (05:22)
yeah, they’re down two to 300 this year. I, there’s no, this is really no prospects for growth, uh, for, uh, 2018 I think at best if they’re able to stay steady, you know, that that will have been a remarkable feat. So I think that there are probably going to be down another hundred to 200. So the net result, well, let’s talk about it. Every, all OPEC production is right around 30 to five, 30 to six right now. Um, you know, I really think it’s unlikely to be much higher than 32. You know, it’s probably going to 32, four
Speaker 1: (05:58)
to 32, eight next year, um, through the year, which is, I think that would, that’s the number that they’re targeting was 32, five. Uh, so they’re are probably going to produce around around that unless there’s some, unless there’s some significant upside surprises. Well, before we get into the, uh, you know, the, the, uh, stock balance and, and, um, uh, I want to just mention that this year’s OPEC meeting was way different than last year’s OCAC meeting. Um, especially from an options perspective. I mean we, we went into last year’s meeting with volatility up around 48%, almost 50%. And this year we went in around 24%. So it’s, it’s just, uh, you know, there was a lot more, um, uh, potential variability last year. And also, uh, we have that issue, um, where the December option goes off in November. So that was gone. So nobody wants to buy a, the December option and they would buy a January instead to be alive for the OPEC meeting.
Speaker 1: (07:06)
And then there was a lot of volatility going into the meeting. So if you had sold December, it was kind of, um, you kind of got caught a little short this time. Not, not so much. I mean we were, we peaked around 20, ran on 25%, 24, 25 and then came out of OPEC around 19 nine and that’s where we are now. 19.7 and we haven’t been this low since. Um, I think it’s uh, uh, June, June of 2014, I’m sorry. October, 2014 we were 20.4 we were trading $90 a barrel up in that area. And the low all time low is 12.8 and that was made in June of 2014, um, long term average of 34.1. So this is an extremely, uh, low volatility, um, uh, market and if OPEC and in this balanced sticks together, um, it’s possible we reached at a record low again, two of 12.8.
Speaker 1: (08:08)
Um, so with that, let’s, let’s talk about what kind of a balance. Um, and I’ll pull some numbers from the IEA. Um, they in the first quarter of 2018, they have supply greater than demand by 0.6 in the second quarter of 2018, they show supply greater than demand by point to, um, their update comes out, the big three monthly reports that we look at, uh, do come out this week. The EIAs is December 12th, Tomorrow OPEC the 13th, and the IEA is the 14th. So maybe you can take us through that, those, uh, uh, balanced numbers, a supply demand numbers for the first two quarters. And tell us what you think. Well,
Speaker 2: (08:56)
first of all, I did want to comment on the, the volatility that you just mentioned, Jim, because I think it dovetails nicely with what we, what you had said about OPEC giving the market guidance and actually coming through. Right. You know, whether willingly, willingly or not, you know, with technical and geopolitical, um, problems. But, you know, you would not have bet the market over the years has, uh, has never given a lot of credence to a OPEC’s production forecasts or any, any of their deals. And, uh, this last year, they really, I think they surprise the market, uh, with how well they complied with their deal and, um, you know, and that’s clearly being shown in the, in the, uh, in the volatility. So I tend to agree with you unless we have a big offset, you know, a geopolitical technical, um, yeah, I, I think there’s a chance that that fall continues to soften because the market, these numbers are coming in, you know, with, with as the market had predicted, you know, as they, as they had looked at it.
Speaker 1: (10:06)
Yeah. It’s funny, I was thinking about this, uh, when we, um, when Saddam Hussein was around that there was talk that he was making comments that were moving the market and perhaps he was trading the futures market. And now I think the way that a OPEC is really, uh, you know, come together, maybe, maybe they’re trading volatility and not, and not true. Not True. I wouldn’t be surprised to see it in our story, the way he is sold a bunch of straddles, strangles and straddles.
Speaker 2: (10:37)
Yeah. No, I’ll tell you the, obviously the big driver of the dealer or the Saudis and, um, you know, every month they’ve been saying this is what we’re going to export this month or the next month. And sure enough, you know, when you look back, those are the numbers. That’s what they export. So the Saudis have been given guidance and, and they’ve been more or less coming through with, uh, you know, with the numbers that they say,
Speaker 1: (11:06)
yeah, let’s not forget they, you know, this, uh, oil markets being bailed out somewhat because of the strong demand numbers, the, uh, uh, we’ve, we’ve, we’ve totally bought into the synchronized economic growth. I think somebody said South Africa’s the only a PMI that’s not about 50, which, which in the above 50 indicates they had an expanding economy. So, um, I think that’s helping out, um, these guys as well. But you’re right. This is, this is extraordinary.
Speaker 2: (11:37)
Yeah. Uh, the, the um, you know, the calls on, on OPEC crude and then getting back to your original question there, Jim, on, on the balances. Uh, if, if you look at the calls on OPEC crude, the IEA is sort of low, the OPEC itself is high and the Eia is right in the middle. So you know, we like to do, or would I like to do is balance is take uh, take the three of them, uh, as an average and a first quarter looks as though it’s going to be 30, the call for all three of them, OPEC, IEA and Eia is 32.3, uh, or you know, slightly actually slightly, um, well right around what they’re, what they’re producing. Similarly in second quarter, uh, 32.5, um, the IAA actually is 32. Is it as you mentioned Jim, so if you take the ias number, uh, there would be a given 32.5, the, there’d be half a million barrel a day increase.
Speaker 2: (12:47)
If you take the three of them, 32.3 versus 30 to five 30 to six, you get a, you get a surplus and second quarter looks balanced and second half looks like this is going to be a shortfall. Uh, if you take the, the average, you’ve got 33, four in the third quarter and 33 one in the fourth quarter versus production of 32, five, four, five, six or seven. But in any event, it’s the call or the demand for OPEC crude is going to be a lot higher than what the production should be. And the, and this is something they’re all going to be talking about in June. And as we get closer to that June meeting, which is going to be pivotal, um, you know, we will certainly have information of where the prices and we’re inventories are, but they’ll, they’ll be talking about what the second half a second half call is.
Speaker 1: (13:37)
It’s interesting you bring that up because again, uh, we, we see this in the, the spread options market. In the second half of a team, you see people trading the plus 30 puts. Um, you know, up to now it’s been the, the flat and the minus 25. Um, and then the on the call side, you see the plus 50 and the plus $1 call. So, so that’s where a lot of activity is. And I know there’s buyers and sellers of these, but they did indicate some people feel like that might be some kind of a range plus 32 plus 50 or plus 32 plus 100. So it’s a little, um, it’s, it’s, uh, an indication that the market is looking at the second half as being much tighter than the first half.
Speaker 2: (14:24)
And Yeah, looking at these, these balances, that’s, that’s what it looks like, at least on paper. But we log paper, I lived reality two completely different things.
Speaker 1: (14:36)
Right, right. So, um, let’s, let’s look at you now. You, I think the, the, um, again, the IAA, uh, tempered their demand for next year because of higher, but
Speaker 2: (14:52)
they also, uh, tempered this year, fourth quarter because of, um, a warmer weather. I mean, you do, you see, uh, are you in line with that? Do you see little we shaving your demand numbers because we’re prices are right now? No, I think the idea is wrong. I really think demand is going to be a lot higher this quarter. And meanwhile, uh, as we speak, it’s freezing in Europe. Uh, this, uh, got some snow, Snow fall on the continents, snowfall in England. So certainly I would think that uh, gas oil demand, uh, should be pretty strong in, in December. Uh, and here in the U S uh, we’re, we’re about, at least in the northeast where we burn, um, where we burn heating oil and diesel. Um, December is looking the next few weeks look, look colder than normal. Uh, so I, I think, I think that demand is not going to be down 300,000 barrel though, are there, I know they, I mean they, um, shaved their estimate by 300.
Speaker 2: (15:56)
I think they going to be finding out that they’re going to be increasing it by two to 300. You know, as we head into the next, uh, next few reports. And the other thing is that we’ve seen backwardation, you know, certainly in the brand market, which would be an indic indicative of a strong demand. And the Chinese, even though the Chinese numbers are really volatile, you know, they, they had their second or third biggest crude important number ever, uh, in November. But again, it’s hard to get that excited even though I’m mentioning it, but it’s not bearish bearish. So I think demand is, is, uh, I think it’s going to, it’s pretty strong. I think it’s going to remain pretty strong. Yeah. There’s a, there’s a price effect. You know, higher prices may cause a shaving demand, but there’s also an income effect if the GDPs of growing a sharply and in areas where, uh, income elasticities are high and then you do see it, you see an offset there.
Speaker 2: (16:55)
So, yeah. And so let’s, we’re talking about Q four a, we’re in Q four and then you see, what do you see for crude oils, domestic crude oil stocks in this quarter, they’re going to draw. I, we, we already saw off last week they drew over 5 million. You know, I’m looking for another four to 5 million draw this week. We’ll see what happens on a, on Wednesday. But, uh, because of, uh, good margins runs, uh, runs a back over 17, they were 17 one 72 last week. So that’s million barrels a day. And we’re ha we have a problem with a imports from Canada. Uh, the keystone pipeline is still running under low pressure. That’s going to back out imports. Exports are strong. We also have a live photo, um, considerations and the Texas school tax. So stocks are going to draw a in the u s crude stocks are going to draw and a while we won’t get down to the four year average. You know, I think we’re going to see over the next few weeks, uh, in addition to the 5 million, I think we’re gonna see another eight to 10 million barrel draw. So, um, you know, we’re, we’re drawing down that with some of those, some of that stock will rebuild in January, the, the, um, tax and the life though. But I, I think we’re getting legitimate stock draws, uh, based on, uh, the, the high crude runs.
Speaker 1: (18:27)
Uh, let’s, why don’t we, uh, continue with the, with the crude runs. I want to talk about, um, export demand and Le Let’s talk about a US product exports. It’s been really an amazing story this year. Um, you just talk about the prospects for gasoline and diesel exports.
Speaker 2: (18:47)
They should continue strong. Uh, they’ve, the gasoline numbers last week was almost 900,000 a day. Diesel’s been running at a one and a half million barrels a day. Um, the lab the last three or four weeks. And uh, certainly the, the, that, uh, export demand from Latin America chiefly, um, should continue with Mexico. This is what, this is one of their highest demand periods, uh, at least for gasoline. And also for diesel. There’s certain extent pre holiday, uh, and they’ve had, um, you know, they’ve had some technical issues on their refining capacity. Plus demand is good. I, the emerging market demand has been, has been, uh, has been very strong so us refiners have been able to, uh, to take advantage of that. And, and, uh, going, just going back to, for to crude for a minute champ, uh, know crude exports have also been, uh, you know, I’ve also been exploding and we have to around a one and a half or not quite that three and a half.
Speaker 2: (19:56)
I mean these, these, uh, he’s a big, big numbers. Uh, you know, I, I think with OPEC and non OPEC producers, uh, keeping to the, keeping to their um, production Thiel, you at us crude has gone into the breach. So, um, you know, and I don’t see that, I don’t see that this, I think that continues as well as the product exports. You know, one thing you and I’ve talked about Jim, I think the EIA is having a hard time figuring out, you know, what’s product exports. So what’s their parents and Matt to me, I know it’s hard to really get a handle. US demand is probably not that good for um, gasoline. It’s probably going to end up unchanged on the year and for this diesel may be up 50 to a hundred, but we’re not sure because these, these week to week numbers are all over the place. Um, you
Speaker 1: (20:48)
know, in addition to having, uh, the usual problem of having a, the tertiary stocks stock movement, when we look at the four week average and then when you have a hurricane come through and that you can’t use that either. You want to get, it’s, it’s, you’re right that we’ve always talked about how these numbers are volatile, but the, um, I guess, I guess the stock levels are still pretty good though.
Speaker 2: (21:10)
Yeah. The stock levels, so are, are good numbers. They’re probably the best, the best they have. And you know, one, one thing that’s, um, we always look at is, is the total stocks have a petroleum of crude and petroleum products. And you know, they’ve, they’ve drawn a hundred million barrels since June. So, you know, we, we, we, we have John Stocks, you know, we had this huge surplus they have drawn down and certainly the market’s reflected that with the big rally Wti from 45 up to, um, you know, up to, up to the high, high fifties. Uh, but it’s not, you know, it’s real, you know, it’s happened. It’s happened.
Speaker 1: (21:54)
And, um, I just want to get your take on the US production response. The, it looks like the EIA has a u s oil production at at 10 million barrels going out in 2018 at, towards the, towards, I don’t know, third quarter, fourth quarter. Uh, we get up to 10 million. You think we’re going to see that kind of response? Are they? Maybe they’re under, over, what do you think?
Speaker 2: (22:18)
Well, the rig, the rig count is going up, uh, three weeks in a row now, but the FDA is looking for growth next year of about 700 a day. That I think that maybe a little bit low. You know, maybe we get to seven 50, 800 and some analysts looking for way more than that. You know, they’re looking for like 900 to a million barrels a day growth, but you look at, some of these costs are continuing to our rise, um, this associated gas problems and in some fields and they’re not some, some of the better prospects have already been drilled. So I, I’m not sure about that. Uh, you know, the million barrel a day increase, I don’t see, maybe maybe seven to eight. I think this is the right number. Again, that number is in these calls on OPEC crude. So the market baby like laser focus land and start wringing his hands on, my God, you know, us for deduction is going up. Yeah. We know that. That’s what we’re looking for. That should be discounted in the market where it isn’t, is going to be in, you know, if they come in way too high or way too low. Right. That won’t be discounted.
Speaker 1: (23:30)
Right. There’s always a expectations built into the marketplace. Um, I’d like to move the conversation over to price action all of the year. Last year, the biggest, uh, most of the, or I guess the biggest open interests option was the [inaudible] core. And I kept asking you if you thought it would go in the money and you kept saying no, and um, you are correct. And, uh, Lo and behold, the largest open interest this year is on the DCE 1860 calls only 41,000. But still, that’s, that’s been around a while. That’s why it gets so big sometimes, but that’s a key number. And my question is, um, what do you really think this year we’re going to get through that this time
Speaker 2: (24:17)
based on Wti? Well, that’s the backbone number. Um, you know, whether it was true, I mean, yeah, I think we got a shot to go through 60 now. And I think that one of the main reasons is certainly that we’re having, we’re having some production problems. You know, where we are having, we’re having infrastructure problems with the pipeline. Demand is coming in higher than we thought. Stocks are drawing more than we thought. Uh, today the forties field was shot in the, in the North Sea. And Brent is rallying, rallying sharply. Uh, so, you know, I, I, I actually think that it wouldn’t surprise me if we see these big stock draws and again, the market is to a certain extent looking for these stock draws, but it would not surprise me in the least. If a WTI has, has a 60 print, um, you know, it could be before the end of the year. We’re not that far. You know, we’re not that far away. So going out of the month,
Speaker 1: (25:19)
roughly, what would be your WTI range? I mean, I know it’s,
Speaker 2: (25:23)
I would add a month into, uh, into January, assuming let’s assume normal weather. Um, I think it would be something like just for just for the months that they like 54 to 61 or 62. So it’s something like that. Now, the other thing that we, we cannot fail to mention Jim, know where you’re going market it so long. It’s so long that at any point there could be, you know, this about, of just like get me out selling, uh, uh, you know, you have to look for that, that saw that. Some of that last week on, what was it Wednesday then Marcus getting hammered. Right. You can’t be 10 to one. These numbers are just, they’re out of control law. So you know, at some point you get to get the sell offs.
Speaker 1: (26:16)
I think the numbers that come out on Friday that tell us how long the market is from the CFTC there as of Tuesday. Right, right. So that Wednesday, uh, action is not in those last numbers right here. So you think there’s been some liquidation from the uh, the, the length that was in there?
Speaker 2: (26:36)
Yeah, definitely. Definitely. Right. Yeah, definitely, definitely. And I think there’s going to be, you know, and this is a problem for playing it from the long side. Um, you know, you’re going to get these big sell off. So I would say if you get one, um, that looks like just liquidate, you know, some long liquidation, you know, that might be a good time that to take a look at the, uh, take a look at the long side. Cause the fundamentals, you know, they’re, they’re improving. They’re looking, they’re, look, they’re much better a year from a year ago. Oh my goodness. What a change. Yes. And um, the runs are high right now. Do you see though, when we get to start seeing them go down for turnarounds, that the runs are going to go down from here? I mean they’re going to go down in January, February.
Speaker 2: (27:22)
Um, and February’s the big turnaround. Um, pcs. Yeah. February, March. So, so they are going to go down and demand for crude is going to soften and US crude stocks will, you know, start, start rebuilding and the market will, you know, which is why you’re, you, you probably get two for the market to really explode on. The upside is going to be, is going to be difficult unless we get one of those 1989 type called snap. Wow. Yes. I just got chills go through me, right? Yeah. The Gulf coast for fires with that. And then we went down, up and then we, we froze. I was a classic and had a guy come into our office.
Speaker 1: (28:07)
He asked me, uh, he said he had like a 250 grand and he wanted to, um, do the most bullish thing he could do and in heating oil options. And I said, well, I had some, had some readings, a ridiculous a ratio. We sell one and you buy five a upside calls and the end, he said, that’s too complicated. So we decided, we said, look, take all that money and buy the deepest out of the money option you can buy and heating oil and a, which he did and everything fell into place. You had the coldest winter. The cold got down into the refineries in Texas and froze some of them up and you know, so heating oil, I went, went through the moon and he, um, he kept selling out as calls and buying more above and it just made a small fortune. But he did win the option trader of the year award that year. The awesome. Yeah. Yeah. So
Speaker 2: (29:07)
yeah, for those of us who were there like today 89, that was a market that will, that will never forget. Right. Interestingly, the, the golf course, the refiners have, uh, you know, invested in. So that doesn’t happen again, but you know, who knows, who knows. Um, so diesel you’re, what, what’s your bullish bullish, the demand numbers have been coming in a little bit soft but I the last two weeks, but I think this week it will be strong and gasoline bearish. Um, we had a big build last week. I’m looking for another bill this week. Uh, gasoline demand has been lackluster. And um, there is, uh, you know, pump prices are probably 30 or 40 cents above your ago, so you may, you may see some elasticity effects maybe, but gasoline demand not, not, not that bullish on gasoline. Okay. Um, one, anything else that we want to add to our, uh, we’ll try to keep it to a half hour.
Speaker 2: (30:17)
I think we’re coming up on that number right now. Anything else you want to add to this? Uh, session, Andy? Well, I think the, um, you know, Jim, you like to ask me what number I would watch. Desert island indicator. What’s the, what’s the desert island? Did the cater and uh, you know, again, I th I think the number’s going to be, um, US crude stocks, number one. And secondly, if there was another, uh, like a Wilson, you know, and that Tom Hanks movie, we’ll sit guy to talk to, I’d look, be looking at total us stocks and see where we’re at relative to the four year average because we’re getting closer and closer. Very good. Okay. Andy, let’s wrap this up. Thank you very much. This is Jim Colburn commodity research group. Dot. Yeah.
Speaker 3: (31:09)