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.
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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 Coburn 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 www.commodityresearchgroup.com, where we post our podcasts and blog.
We’d like to thank our friends at EKT Interactive oil and gas training for hosting this podcast. Check out their newsletters, podcasts, and learning modules at www.ektinteractive.com.
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 December 15th, 2022. And Andy, we, we have a, as always, we have a lot to talk about.
Good morning.
Let’s, let’s get right into Russia.
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Okay. Good morning, Jim. And, uh, hello everybody. It’s been incredible year, actually. And, uh, certainly Russia has been, uh, front and center since February, since his, since the, uh, since the invasion. Uh, we’ve had sanctions levied upon sanctions. And, uh, now we are into the embargo period where, uh, the EU has embargoed Russian crude, uh, and in February, they’re gonna embargo Russian products. Now, despite all the sanctions and the, uh, embargoes, Russia has been able to export almost as much as they did prior to the invasion. And, uh, last month, according to the, the i e a, they, they were able to export 5 million barrels a day of, uh, of crude. Uh, they’ve been able to place their European market with, uh, the Asian market. Uh, in particular, India has taken up, uh, much of their, uh, their lost market, uh, their lost European market.
And China has also stepped up to, um, take up a bit more, uh, of their loss, uh, European market. And the Russians have been able to try at least to diversify some, some of their, uh, some of their sales. So we’re in the embargo period. And, uh, it looks as if, you know, Europe has been weaning itself off, uh, Russian crudes. They, uh, last month they imported only about half a million barrels a day of seaborn crude. Plus they imported, um, uh, probably 600,000 barrels a day of pipeline crude, maybe. Uh, so another 300,000 of that is going to be lost with the embargo, which will leave them through their friendship PI pipeline, another 300,000 barrels a day. Um, so there’s 800,000 barrels a day that, uh, Russian has to find a, a new home for. Uh, whether or not they’re able to is, is a big unknown in, in the market.
Uh, certainly, um, they’re going to try to export, increase exports to, uh, Asia and, um, you know, other, other, other destinations. Um, and we’ll see how successful they are. Certainly, uh, a big impediment is, uh, the tankers. They’re gonna need tankers, uh, to, uh, do longer voyages if they are able to sell them. And of course, Jim, the big, you know, the, they’ll be able to sell them at a, at an increasing discount. And that, of course, is, um, you know, one, one of the, one of the, uh, end games for, uh, the EU and the US is to, um, have Russian revenue from, uh, from petroleum sales reduced. And, uh, you know, it looks as it looks as if it’s working despite, you know, they came up with this price cap, um, which, you know, really is at the end of the day is, is probably, uh, unworkable.
So looks as though, however, it looks as though the whole strategy for now, uh, looks to be, uh, fairly successful. Now, the second thing we’ll be looking at is in February, uh, there’s an embargo on refined products exports to, uh, Europe. And that’s mostly the most important thing, is the diesel, which is around 600,000 barrels a day. Again, we’ll see if they’re able to sell total refined products. Production is probably exports, you know, it’s probably near a million barrels a day. And we’ll see how they’re able to market that. If they’re not able to market the, the products, they’ll have to reduce production. So I think overall what we’re working with at CRG is we’ve got 1.2 million barrels a day of, of reduced production, but it could be zero if, if it’s, if they’re able to, you know, if they’re able to market those barrels, if they can find buyers, uh, what, you know, whatever, whatever price.
Yeah. Um, the, the price of euros right now is still under $60, right?
Yeah.
Is it pretty, it’s pretty close, I guess
It’s close. Yeah. It’s close to under. Right.
I’m wondering, I mean, part of the, part of this, uh, price cap was to try to keep Russian oil on the marketplace and reduce their revenues. I mean, they didn’t want to disrupt, you know, I mean, you’re disrupting oil transport, but you still want to keep a lot of oil on the market to keep prices down. So I think, you know, does, is it possible that having this price cap gives the green light to countries to buy some Russian oil, as long as it’s below $60, they’ll go ahead and do it even, and not worry about getting, uh, the wrath of Europe or, and, and, um, feeling the wrath of Europe and the us and is it, is, is that possible?
Yeah, it’s certainly, it’s certainly possible. Again, they have to get, uh, because under the price cap scheme, they have to get, they can’t get European insurance, right. Uh, shipping. So they have to get their own shipping and, and, uh, insurance, which is growing increasingly costly because, you know, the, this big demand for tankers right now, particularly ice breaking tankers Oh, right. Uh, to get crude out of the, out of the Baltics. So, um,
Yeah, I’m an options guy. Andy. I don’t think about ice breaking issues. <laugh>, you know, that’s, you’re right. I mean, it’s, you think about oil, you know, you have to move this stuff. That’s, there’s, that’s right. Yeah. So,
So, so let, let’s get back. So there you have, you know, there you have where Russian, where, where is Russian production gonna fall? It, it’s running, you know, it’s running pretty high right now. It’s at 10.9 to 11 million barrels a day, which is close. Just a few hundred thousand barrels a day below where it was, uh, before the, uh, before the invasion. So is that gonna fall as, is it, it’s anywhere between zero and 1.7 million barrels a day. Uh, you know, there it lies. You know, <laugh>, that’s a pretty big delta, right?
Yeah. I mean, there is a consensus though, wouldn’t you say? Or is it or not?
Yeah, the consensus is around a million.
It’s around a million. And, and what’s, what’s your feeling on that? Is it, what’s, what’s your under over is on the, on the million?
Yeah. As I said, I have, uh, you know, I’m, I’m sort of at 1.2, but I’m not ruling out, you know, it could be much lower than that. It could be, it could be higher than that, because I mean, some of it’s gonna be price determined how low they, they discount, uh, where demand falls, you know, or the Chinese gonna want to increase, increase their purchases of, of Russian euros at a cheap price to put it into storage, maybe.
Yeah. Uh, it, it’s a, it’s, it’s interesting. I keep going back. Um, you know, Russia, these are your friends. They’re, they’re, they’re buying your oil at a deep discount,
Right?
I mean, that’s, that’s what the friendship pipeline’s all about, I guess. Yeah. So we have underestimated the amount of oil that’s been, that Russia’s been able to market and products all year long. Would you say that’s correct?
Oh, yeah. I mean, you, you know, the I e a was talking about a 3 million barrel a day, uh, decline in Russian, in Russian production, and it turned out to be, it’s probably averaged, yeah, it’s probably averaged, uh, maybe half a million barrels a day, may be higher than that, a lo uh, lower than that, a loss of Russian production. And as I said, you know, they’re pretty close to where they were in January right now.
So let’s keeping with the, uh, supply issues, um, OPEC plus change, uh, uh, reduced, well, their last last meeting was unchanged, but they’ve, uh, talked about reducing 2 million barrels a day. And, um, what’s, what are you seeing from OPEC plus production?
Well, OPEC is probably down, according to their last numbers. They, they were down around 800,000 barrels a day. I’m sorry, 700,000 barrels a day. And of course, most of that is, uh, Saudi and, um, Iraq. Yeah, the Persian golf, the uae, the Persian golf producers, uh, plus Iraq, I think that 2020, they were at 28, 8, 28 0.8 million barrels a day last, um, last month. And, and I think for the, for the remainder, uh, what, what I have them is around 29 for the rest, the 29 million barrels a day for the rest of, um, 2023. But of course, you know, that that can change based on where the market is and whatever geopolitical developments are, are, are underway. So, um, you know, they talked about 2 million barrels a day, uh, for OPEC Plus, and they, they couldn’t meet that. If Russia’s production go, Russia’s an OPEC plus producer.
If ro, if Russian production falls, you know, around a million barrels a day, you know, then you have 1.7. However, uh, there’s gonna be, uh, an an increase of production out of, uh, Kazakhstan, maybe, um, OER Baja as well, maybe. So net, you know, again, uh, I think opex gonna be pretty steady at the, at this level, near 29 million barrels a day. Maybe, you know, n Nigeria’s talking about perhaps increasing production. We’ll, we’ll see Venezuela as well talking about increasing, uh, production. But, um, I, I, I would say 29 million barrels a day is a pretty safe bet. And then we’ll see where the plus of opep Plus comes in mm-hmm. <affirmative>, um, right before, and again, that’s pendant on, uh, what happens with Russian production,
And we’ll probably will see it after. I mean, they, they’re having these monthly meetings and they tend to, you know, you don’t, you don’t see the leakage first. Maybe you see the policy stated first and then, and then the move, you know what I’m saying?
Yeah. Yeah. I, I think, um, again,
It’s
More ordered, you know, this, it, it seems to be more, yeah, it seems to be more orderly. Although they didn’t really project that 2 million barrels a day cut. I guess they didn’t want to, you know, get the administration as mad as they got before they had to, uh, the Biden administration as mad as they got, uh, as mad as they got at the, at the Saudis.
Yeah. Let’s talk about, uh, another number that we are trying to nail down China consumption,
Uh, right. <laugh> very, yeah. Certainly not an easy number this year. China certainly had a, they were down probably, we have ’em down 300,000 barrels a day from last year’s number. And, uh, next year,
Andy, what was that number coming into the year?
Uh,
It was, it was up about that amount, right?
Oh, coming in. Yeah, yeah, yeah, yeah, yeah. Coming in. They were looking at, uh, up, yeah, at least up about a half million barrels a day. So China came in, you know, there’s a big, there, there’s certainly a, a major, major switch mm-hmm. <affirmative> from, um, you know, that’s, that’s something really a million barrels a day. Right.
Anyway, the certainly they’ve now, they’ve now changed their, as we all know, they’ve, they’ve gone away from the zero covid policy, which the market got very excited about. But, and I think the market remembered what happened to all of us when, uh, there, when some of the restrictions were lifted and, uh, you know, how, how brutal that could be in terms of, um, people just getting sick, right. And overwhelming the hospitals and what it did to demand. So it’s, it’s hard to say that Chinese demand is really gonna boom in the first half. I don’t think it will. I think it’s gonna be unchanged to lower in the first half, and then maybe by the second half there’ll be, you know, decent growth. I mean, there could be, there could be a, a really nice, you know, there could be a really nice pop in in sec in third or fourth quarter next year. But again, there’s another, you know, fairly big unknown to the market.
So all these numbers we’re talking about, we, we end with, there’s a huge unknown about the marketplace. And, and I think we, we were having this conversation before we started taping, but, um, why don’t you talk about the second half of the year and the eia, uh, which is the U us’ doe stats and analysis arm, and the I e A, the international, uh, energy agency outta Paris, their divergent looks at the second half of the year in terms of stock builds and draws.
Jim, you, you, uh, wanted to make sure that I saw the I e A balances on one of the, the news services and, you know, I looked at it and I almost immediately said to, or Yeah. What I wanted to say is check the, check the guard, check the US balances. Cuz the I e A is showing draws in the second half of an average, let’s say, of 1.6, 1.7 million barrels a day. The US government is showing builds of 700,000 barrels a day. So the 2.2 million barrels a day away on where they think the second half of the year is. And you know what? I don’t blame either one of ’em. I think that, you know, either one could be right, depending on the scenario, depending on the scenarios, right. Either one could be. Right.
Um, well, I saw, I saw that, um, supply demand balance chart from the I E A and I, I want to get my, uh, grandmother to open up a commodities account and start buying
Calls <laugh>. Right.
You know, it’s just, holy cow, that
Was great. Right. Well,
And it’s widest that Exactly. You know, it’s widest at the end of the year.
Yeah. Now, what we have, what what we’re looking at is, uh, we’ve got draws in the second half as well. Our average draw is around 750,000 barrels a day, uh, with the fourth quarter looking pretty strong. You know, do I have a lot of confidence in that? No, because every single one of my variables could be wrong. You know, opec, I think the OPEC production is gonna be okay. Not in terms of non OPEC production. The big swing o of course, as we said ad nauseum is Russia. And, uh, then, you know, non OPEC production is, is due to grow nicely this year, excluding Russia. Uh, but it’s the usual suspects, you know, in Norway, the us, Brazil, Guiana, you know, are they all gonna come through? Now, one bit of excellent news for consumers and for Europe is that Norway, uh, Norway’s big field, they, they’re up 200,000 barrels a day, whether they’re, they’re their second, their latest phase of production just kicked in. And, um, you know, that that’s, that’s a Euros like crude. Yeah. Um, so that, that’s, you know, great news for, uh, Europe that, um, you know, there’s, there’s an extra 200,000 barrels a day of, um, light sour crude coming, you know, that’s gonna be produced in, in Europe, and I’m sure will be demanded by Europe. That’s great. Uh, in Brazil, you know, Jim Brazil. We’ll see. Right. We’ll, we’ll see how they come through and, uh, I know we want to talk a lot about the US production. We’ll see where we come in.
Go
For it. And Kiana, Dean’s expected to, to grow production, uh, production as well this year,
Kiana. That’s unbelievable. Have they been invited to be, uh, OPEC country yet? I mean, OPEC member,
You know, if they know what’s good for them, they’ll, they’ll stay independent.
<laugh>, they, they get to go to Vienna,
They get to go to Vienna. Maybe they get some good insight information, maybe. Yeah. I don’t know.
You, you mentioned US production, um, expected to be up in 2023, not as much as 2022. Talk, talk about that.
Yeah. That has been a, uh, I think it’s been a real, real disappointment, I know, to both of us. Uh, yeah, we thought that US product crude production would be, uh, much higher than where it’s ending. I I think it’ll, it’ll end up around, I don’t know, five to 600,000 barrels a day. And you would’ve thought based on past performance, uh, that we’d be up on crew production, you know, closer to a million barrels a day, given where the price is. And, uh, right. I mean, and it, it didn’t, it didn’t come in for a variety of, for a variety of reasons.
I, Andy I mentioned this to you before. The, uh, the EIA has an excellent, uh, series called this Week in Petroleum. And th and this week they have a, a nice chart showing the cash flow, uh, that the extremely high positive cash flow to us, uh, producers and a, a CapEx level that’s not at its peak compared to other, you know, just, just a few years ago. And so obviously talks about this, this is a story that’s been around for a while. You know, they’re, they’re buying back shares and they’re, and they’re increasing dividends. And so, you know, there’s, there’s discipline. I mean, I, I, we, we grew up thinking, I mean, in our experience, when the price was right, oil companies drill and there seems to be more discipline, which is what we’ve been hearing. And, you know, there’s bottlenecks. But, um, you know, you would think that this may, maybe, maybe the CapEx spending, you know, you can’t compare it dollar for dollar to the last peak. Maybe it’s much more efficient CapEx spending and much more profitable areas than, than in the past. But, um, still it’s, we’re not, we’re not seeing that supply response that we, you and I had thought we would, would see.
Yeah. I, I, and, uh, that’s certainly been a, a pretty, that’s been a built bullish factor all year long, that these numbers are coming in lower than, uh, x specs. Uh, next year, the, um, EIA is looking for an increase of 500,000 barrels a day of, uh, crude and, uh, on NGLs. They’re looking for about 400,000 barrels a day increase after a 500,000 barrel a day increase, uh, for an, for natural gas liquids for, um, for this year. And I guess that was a good story. You know, that was a big story that, uh, NGLs increased as much as they did. And I, I, I, you’d have to say that based on this last year, that the, i’s gonna be, that that number’s probably close to the right. The other thing is you, you’re the, the correlation between the rig count and the production, you know, that’s fallen by the wayside cuz rig count has grown all, all year. Mm-hmm. <affirmative> and production hasn’t grown, you know, anywhere near as, as much as the, uh, as much as the rig count.
Hmm. Interesting. That CapEx idea that there’s just, you know, it’s gonna, uh, dampen, um, increase supply was probably, uh, spurred a lot of long-term bullish calls in the marketplace that just haven’t materialized yet. And, you know, when I look at what people are actually doing in the world of options, the, the, the call side upside call structure is dominated by these, uh, $1 call strikes. So, you know, when I look at the top open interest strikes, I get, uh, the June 1, 19, 1 20 and 1 21 calls, and the, and the nine, the 1 19 121 have 70 to 75,000 outstanding contracts to June one twenties, 35,000. Some of that is $1 call spread trading, but there’s also outright call buying. So this is June of 23. And these were put on, you know, a little while ago, Feb one oh four, one oh five call spreads like 45,000 of those similar amounts to the one fourteen one fifteen call spread and Feb and the one nineteen one twenty call spread.
And Feb, some people talk about this being a, um, uh, a hedge against the, the, these, uh, digital options where, you know, if a price threshold is reached, a cash payment is made, and, and these would be market makers while setting that, I’m not quite sure that’s, that’s correct. It could be just a kind of a, a hedge fund that wants to get along these, these, um, you know, a bullish play in a, in a big way, should it, uh, pop. More recently, we’ve, you know, as we get came outta Thanksgiving, we saw, uh, Jan options, uh, include W T I, which go off today, pop and, and implied va. And, and you know, part of that was probably the, the, uh, OPEC meeting and also the, uh, Russian, uh, embargo taking place. However, as we know these things, you know, it just, it’s not like dec was it December 5th I think was the day.
It’s not like December 5th shows up and all of a sudden the embargo happens, people anticipate. And so not sure exactly why that Jan Valve popped up, but Feb went the other way. FEBs now around 44%. And that, that’s kind of low. I mean, from where it’s been, uh, recently I was looking at the Feb crude Feb heating oil implied valve spread. Cause I thought maybe you’d see heating oil become much more volatile than, uh, crude with, you know, winter coming on. And originally the, um, spread was about eight points. It’s narrowed to about two points now with the heating oil over. So, um, uh, keep, keep an eye on that thing, see what happens. But, um, yeah, so more recently we’re seeing more core volume trade and people are at, at these lower prices. Uh, people are definitely, uh, opening up new positions on the call side. So there’s still this, you know, eternal bullish view that, uh, this market’s going up into the, the hundreds area. I don’t, I don’t know, um, I guess all the banks are, are touting that view, right?
Yeah. And you know, I know that one of the big banks just reduced, its, its estimate for fourth and, uh, and first quarter they were, they were looking for, uh, prices to average a hundred dollars in the, in the fourth quarter. And that clearly is wrong. But I, I think that their, uh, you know, their big thesis is that, uh, which you spoke about, Jim, the, the caped that we we’re, we’re under investing in, um, in all commodities, even, even at, with the higher prices that the CapEx didn’t grow as much, and that, that could lead to shortages later on. And, uh, certainly if, if demand is is, you know, if demand is as strong as some people think for next year, and that’s the other thing, Jim, you should, these estimates for demand for next year, they’re all over the place. OPEC OPEC’s looking for 2.2 million barrel a day growth.
The I e a, I think is at, uh, 1 7 7. Yep. Yeah. One seven. Yep. I think the government’s like around one five, you know, the i a and, uh, we’re, we’re like around 1, 2, 1 3. So tho those estimates are, are, are also all over the place, um, dependent on how strong or weak you think the economy is gonna be, uh, where Chi and where China comes out, uh, on, on, uh, on its demand. Um, you know, again, you know, you, you’re looking at some pretty big, um, big swings. And the other point I, I think that you were making, Jim, is that, you know, these banks have been touting the, the hundred dollars scenario. And, uh, certainly there was a lot of, um, and, and there’s been a lot of the, there’s been a, there was a tremendous amount of net length built up into the, into this market right. In, in, in anticipation of, um, the embargo and the zero, you know, zero covid. And, um, you know, it’s, so length has now been liquidated, basically. Uh, here’s an amazing stat. In the last four weeks, the net length of Brent, um, speculators large money managers was down 143,000 contracts. Geez.
One week alone it was down 70,000 contracts. And I think this was also part and parcel of for a lot, for much of, uh, last this year. The, the play was the inflation play, and you wanted to be long commodities. Uh, and then all of a sudden November, I think it began that that inflation play was sort of going by the boards with the rising interest rates, and it became more of a recession play. Uh, or let’s not be that long for commodities, you know, let, let’s be flat or maybe even a little bit, they’re not net short, but, uh, you know, I’m certain, uh, certainly the, um, big liquidation was, was one of the main movers in crude going from like 90 to 70, you know, in the <laugh> blink of an eye. Yep. And everybody, including myself, who had forecast, Hey, it could trade by, it could trade a hundred by December, January. You know, we’re all sitting there with, uh, you know, egg, egg all over our faces.
Right. At least it’s scrambled egg.
Scrambled egg. Yes.
Right. Yes. And you mentioned the, uh, you know, the macro environment, um, you know, the feds just raise base 50 basis points, uh, interest rates, and, and they said you’re gonna, basically, you’re gonna keep interest rates higher for longer. And, um, I guess their terminal rate was bumped up a little bit and the all their dots, uh, are are up there as well. So, so, you know, if the Fed stays true to form, they’re gonna overdo it. And so that might also be a problem with oil demand. Um, I remember, uh, uh, a prominent, uh, oil economist said, if you, if you can get a handle this, this is, uh, pre covid, he said, if you can get a handle on the G D P and, and weather, you got a pretty good idea about, uh, you know, where, where, where, uh, oil demand, uh, will be. So, um, I don’t know if it still, if it still feels that way with all the stuff that’s been going on, but so there, so there might be a, you know, a recession in, in our future that really takes this market down. And so it’s, so it’s, um, it’s really interesting because the, uh, you know, the tails are in play. Both sides. Right?
Both sides.
Yeah. Yeah.
You know, along, along that note, uh, on the, the, uh, recession, one, one thing that we’re definitely seeing on on demand is that gasoline demand in the United States stinks. I mean, November was a disa is a November, and now into December is, is is a disaster area. Um, we’ve had like four straight weeks of 8.3 million barrels a day. And, you know, we had, we had forecasts, or I had forecast eight, eight or eight nine as November demand. So, you know, there’ll be revisions and everything, but no, those are, that number is horrendous. Like really, really horrendous. Yeah. And, uh, you know, we’ll see if it’s just the quirk of the, of the month or, uh, you know, it isn’t like demand was booming all, all this year anyway. Uh, it, it, it hasn’t been, it’s probably gonna end up a little bit ahead or a little bit behind last year, but nevertheless, this is like a fall off the table. Uh, poor demand,
You know, if you think about inflation being up, that that cuts into people’s real incomes, and that’s, it’s gotta show up somewhere. And, and even now with November rolling in, and now we’re in December, uh, utility bills are gonna be much higher than they were last year, especially the heating part of it, whether it’s gas or, or oil. And that’s gonna pinch as well. So that, and you think about food and energy, uh, uh, costs going up, taking up a little bigger bite out of a budget, it’s gotta show up somewhere. And maybe, maybe that’s what’s happening. I don’t, I don’t know.
I, I think that’s a plausible explanation along with, uh, you know, some of the larger trends, the, the work at home, you know, the, the rise of, of, uh, electric vehicles, uh, certainly the high prices, although now, uh, we’re below where we were last year, and pump prices have really come off hard. Right. Uh, and that’s, you know, as a result, one of the results of, of, um, pathetic demand. Yes. Um,
Um, so
We’ll see for, you know, we’ll see for next year. The diesel demand too is nothing to write home about. So, um, you know, it’s not as bad as gasoline, but it’s not particularly good either.
So, um, you’re telling me refineries are, uh, crying right now?
Well, no, they’re not crying. They, they still have decent margins, but, you know, they came out of, what, what’s happened is diesel margins were so great that refiners came out of turnarounds. And, and also remember there was no damage due to hurricanes this year. So refiners were able to come out of, of, uh, the maintenance period and crank, I mean, really crank with the, you know, and crank for diesel. And, and when they’re cranking, they’re, they’re also making more gasoline. So we’ve seen over the last few weeks, gasoline stocks billed by, uh, like 18 million barrels and, and diesel stocks up 14. We’re still tight here in the Northeast, but there’s been, it’s not as bad as it was. And margins. Yeah. They’ve come off, you know, they’ve come off, they’re still pretty good. Mm-hmm. You know, they’re not gonna, you know, I don’t think they’re gonna stop runs.
Uh, uh, unless, you know, we didn’t talk about the, um, well, we didn’t talk about the keystone pipeline going down, which it did. It was a leak and it was closed. I don’t think any of the, actually margins in the Midwest are, are four cash prices are well under the screen and margins really aren’t that good. So, um, you know, maybe some of the, and depending on how their crude slates are and how, how they accrued supplies are, you know, maybe some of their, the Midwest refiners will, uh, cut back a little. We’ll see. Mm-hmm. <affirmative>, uh, Gulf Coast too. The margins aren’t great. They’re not bad.
Yeah.
The Midwest, they’re not gonna cut back. Yeah. The mid, the Midwest are gonna cut back, because if you have access to, um, w t I you’re, you’re, okay.
The, um, t stone leak was it, that brings about, what, 600,000 barrels into the country?
Right, right.
Um, what’s the latest on, um, when we’re gonna get that back? Or, or partially back or?
It’s partially, they, they’ve reopened parts of the pipeline. They haven’t really announced when the, there’s gonna be, uh, the full reopening. So, uh, you know, hopefully it’ll be in the next week or two, but obviously it’s gonna start, it, it’ll bite, you know, it’ll definitely bite. You know, one, one last thing, talking about the Keystone pipeline. And the supplies are Cushing, which are really, really low right now. And there was some, uh, concern that if the keystone was down for, you know, into January, it could go under operational minimals, but yet incredibly the, um, the, the structure collapsed.
I know, I was gonna knew you were to say that. Yeah. I said, what, what’s going on there?
What is go I, you know, <laugh>, I, I really, I, you know, I, some of it had to be the liquidation, the speculative liquidation, but you’d think it would just like roar right back. Yeah. And, uh, and it hasn’t, maybe runs are gonna go down. I, I don’t know. I mean, that, that, and, uh, the Brent too brent structure was, was contango as well, but that may be because of the high Russian production, and apparently there’s euros all over the place, so, so maybe that’s, you know, they overdid it, right? Their appetite got way too big prior to the, to the embargo. Right. The refinery appetite and maybe the greater appetite. I don’t, I don’t know, broad, but here, I, I don’t, it, it’s hard to fathom how the structure has come off so hard.
Well, we’ll keep an eye on that. Um, so January options go off today, so the futures go off in three more business days. So we’ll keep an eye on that spread going out, and also see what happens with, uh, fed March and keep an eye on you. You say they’re not gonna cut back runs, but that, that also looks like a, uh, less a lower demand situation where maybe somebody is gonna cut back. So
Right.
Keep eye on that as well,
Which would certainly be, you know, that obviously would be bearish, but, and then we head into February. It’s turnarounds anyway, you know, I think, and we’ll, we’ll see, you know, the extent of the Feb March turnarounds. But, um, yeah, we’ve got a really interesting year coming up, <laugh>. We do after look after incredibly, you know, it’ll, it’ll be hard pressed to, to be as interesting in 2023 as 2022. Uh, you know, I don’t wanna say, we’ll see. Val, what was the high involved this year, Jim?
Oh, that’s a good question. Um,
Around,
Yeah. You know, I don’t have my sheets in front of me, but did it get up to 60 this year? I don’t know, but we’re, we’re pretty, we’re at the low for a while now. Yeah.
Yeah.
- 44%. Yeah. I just wanna, before we go, I wanna talk about the spr. Are you getting a lot of questions like at Thanksgiving, are we, are we worried that the SPR R is getting too low? And I didn’t think it was, um, but I want to hear what you have to say.
I don’t, I think, I don’t, I don’t think it, it’s too low. Uh, we, we’ve sold about 700,000 barrels a day out of the S P R and it is gonna be replenished. Uh, it’s just a question of, of when, uh, certainly when the market was down at 70, there were a lot of people saying, well, this would be a good time to be in the back of the curve, you know, to try to do something in, in the back. And then I was thinking, you know, really would be great if, if we could hedge in the back of the curve when it was Oh, please. You know, had five handles. Right. Yeah. And then I’m thinking, alright, who’s gonna be brave enough to put on a position knowing that the opposition party, no matter what happens, is gonna be back trading you from Yeah. Here to, you know, the 2024 election. But it would be great if we could do
It. Well, just, I mean, think about you, you, you could, you could finance your storage if you think, but all times we’ve been in contango, in deep contango where they could have just filled, you know, it’s kind of what China does. They would prices, they, I mean, they actually probably call prices, but you, you have a spread going where, where you can buy it cheap and sell it. You could, you, you know, you could even, you don’t even have to do it. You could rent out your storage for a good amount that you have that’s not being used. Not sure the Fed knows there’s a price curve. Yeah. Based on
We gotta know that.
You would think they would. Yes. You would think so. Oh, I mean, I don’t know
Those dos
I mean, because it’s, there’s sometimes it’s self-financing, you know, there’s, there’s things to do that just make sense. Not even, it’s not even a spec play. It’s kind of a, this is what you should be doing. Let letting some oil out and buying it back cheaper in the back part of the curve. And
What a great trade.
You don’t have to do it on a big amount, but just enough to, you know, pay your bills.
And, but in any event, given, given where we are, uh, on the, the S P R, remember there’s a big change from when we first started, um, filling those soft caverns when we were, you know, we were huge importers, right? Uh, we’re still in, we’re still in that importer of, of crude, but for petroleum, we’re, we’re a net exporter. So, you know, I think given I could do the math really, uh, we’re supposed to be 90 days of, uh, of net crude exports. So that will be, we’re like 2.4. Yeah. We’re like at 161 days, I think if I did the math right. You know, it’s almost double of what we’re really supposed to have. So, no, the answer is, uh, the s p r is, I think, in pretty good shape for us.
Yeah.
I, I don’t, I don’t foresee, unless prices get outta control again, you know, I don’t, I don’t think we’re gonna have any more releases that they could move up some of the the, there are, there are, there are sales scheduled, but they were scheduled not because of a, a shortfall. They were scheduled to pay for a fiscal to pay for for the budget. Right. You ever this Oh geez. Yeah. I mean the Congress used the S P R to, uh, to pay for, uh, you know, they’re, they’re shortfall. So all these guys that have been bitching about us selling s p r barrels, you know, they, they should look in the mirror cuz they’re using it to sell to finance their bo their finance, their deficit.
Oh, that’s, yeah. We’re, I don’t know, Andy, you hit, I can’t bring this up because it’s, you sound like a, a, a kook. But this, we have some, I think we have an issue with our deficit, and I don’t know, the guy we have in office now, he just wrote another check, we’re 50 billion. And he’s like, where’s this money coming from? He’s all billions around, remember what of billions used to be real money now it’s now he’s throw trillions around. What am I talking about? But it’s, um, yeah, we, we, so at some point we’re gonna have to pay the piper or our, our kids will, I guess. I don’t know.
Um, yeah. But I have to say, uh, really that, that releasing the, the s p r barrels, uh, I think was, was, um, in retrospect, uh, a good play. Yeah. And, uh, did help, did help to tamp down, uh, crude prices and, uh, eventually, even though the crunch on gasoline was not, you know, had, there were a lot of factors for, um, pump prices going over $5 this year. You know, I, I do think that release in the s p R was the right thing to do. And, you know, I think if I was president, god forbid, <laugh>, I would’ve done the same thing. Oh
Yeah, definitely.
And I also would’ve, I also would’ve tried to repeal the Jones Act.
Yeah. Yes.
Right. We’ve talked about that. Talk
About that.
All right. Anyway, let’s talk about price.
Yes. I was just getting to there, uh, looks like we’re around, uh, $76 in January. W t i, give me a gimme a pro a projection for the next month.
Well, what I th I think that given what we are looking at the, you know, we’re, we’re looking at for the first half of the year, a modest surplus, but it could go either way to a, uh, a modest def deficit. Again, as we said, there’s a lot of scenarios, but just based on, uh, what I see in, on the s and d numbers, uh, I had written in our monthly report that I thought for w t i, that 75 to 85 was a, a decent range. Uh, and then immediately the day after it was released, of course the market went like straight to $70
<laugh>. Of course. Yeah. Well,
I still think that’s, you know, for now, I think that’s a good range, 75 to 85, you know, the, the, as we said ad nauseum, there’s, there’s a lot of uncertainty and, uh, we still have the, we still have the winter ahead of us, you know, at least, at least January and February ahead of us. So I really wouldn’t want to get too short this market. And with the, with the big liquidations, you know, a lot of the length is gone. So, um, I I, I think there’s some, I think there’s some modest upside. Uh, I don’t think it’s a, I don’t think it’s a hundred unless things, you know, unless the weather really gets cold, you know, brutally cold. Right. Uh, but I think 75, 85 is, is, is good.
It’s a good number. And what would you say going forward is the strongest and the weakest of the three crude oil diesel distills in, um, gasoline prices?
I, I think, well, again, had, if you look at, uh, inventories in Central Atlantic and New England, they’re really low still. You know, we’ve rebuilt them some for
Diesel. Uh,
For diesel, yeah. For diesel. So, you know, I still believe that should we get a really cold, you know, things, if we get one of those 1989 type winners, uh, there, there could be, you know, there could be a massive squeeze on, um, on diesel. So, you know, I really, I really wouldn’t want to be short New York car diesel right now. So I guess I would say, you know, I’d ra i diesel is the one that I think could be, could be the strongest. And then we’ll see, you know, a lot of, a lot of the diesel for the rest of the, you know, as we look out a lot’s gonna depend on what happens to the, you know, the Russian exports where the Chinese, the Chinese have been exporting a tremendous amount of diesel. So we’ll see, you know, where Asia comes out. If we still see, start seeing a lot, a lot of barrels coming out of that. And of course the global economy, you know, are we gonna grow? Are we gonna be stagnant? Are we gonna be into a big recession?
Recession? Do you see anything that’s gonna help gasoline demand going forward? Do you expect it to kind of,
I can’t believe it’s, yeah, I can’t believe it’s gonna stay that bad. <laugh>, you know, that’s what I, you know, well, January and February or soft anyway. Right.
But yeah,
You know, I guess we know that, uh, ev vehicles sales continue, their market share continues to grow and, uh, that’s certainly taking out some demand and people still wanna work from home and that’s taking out some demand. Right. Uh, so, you know, we, we will see. I just, again, I can’t believe it could be this bad <laugh>.
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Okay Andy, let’s wrap it up. Anything that you wanna talk about that we missed? I think we covered a lot here today.
Yeah, we covered a lot. Just wanna wish everybody happy holidays and thanks for listening to us this year.
Thanks, Andy.
Okay. Thanks.
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