Commodity Research Group (CRG) is an independent research consultancy specializing in base and precious metals, as well energy products. The Group provides research and general price analysis for these markets, along with advice to companies seeking to construct hedging strategies.
In this podcast, oil market experts Andrew Lebow and Jim Colburn discuss key fundamental forces driving oil prices in both the futures and options markets.
About Your Hosts
Andrew Lebow has been involved in the energy derivative area since 1980. He began his career with Shearson Lehman Brothers where he worked in the initial formulation and marketing of the NYMEX WTI crude contract in 1983 as well as the NYMEX gasoline contract in 1985.
Mr. Lebow has appeared before the State Government of Alaska as well as the State Department of Defense to discuss hedging techniques. Mr. Lebow is also well known as a market analyst and is quoted frequently in the financial press. He has appeared on television on CNBC, NBC, CNN, CBS, and PBS. Mr. Lebow holds a BA from Lafayette College and an MBA from the Kellogg School of Management at Northwestern University
Jim Colburn is a futures and options professional with 30 years of wide ranging experience in commodity markets. For much of his career, at Man Financial (1989-2011) and Jefferies LLC (2012-2013), Mr. Colburn worked with major integrated oil companies, hedge funds, pension funds and other entities to develop market hedging and trading strategies.
He has conducted trading, hedging and risk management workshops in energy markets worldwide.
Mr. Colburn is a published author on options trading, hedging, market making and risk management. In 1986, while at the New York Mercantile Exchange, Mr. Colburn helped develop new markets in energy option contracts by educating the oil industry, banks, floor traders and brokers, worldwide.
This is Jim Colburn of Commodity Research Group.
I’m with Andy Lebow also of Commodity Research Group and we’re here to talk about energy markets.
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This podcast should be construed as commentary, merely observing economic, political and market conditions and is not intended to refer to or endorse any particular trading system, strategy or recommendation. We are not responsible for trading decisions taken by anyone. Information is not guaranteed to be accurate. This is not an offer to buy or sell any derivative.
Today is February 20th and it’s 2:49 in the afternoon.
Andy Lebow, we’re sitting here, uh, looking at a major virus. You’ve got locusts running all over Africa and we have some, uh, presidential politics that look more like a mud wrestling. And I want to know which kind of which disaster you want to take up first.
That is a, that’s a tough choice, Jim, between the, uh, between the three plagues, right? Whether we’re going locus disease or, uh, who wants to be the next Pharaoh, uh, it’s very biblical. What’s going on right now? I have to say it really is, uh, you know, we, we, we continue to live in very interesting times.
Andy, we had the, um, the big three come out last week. Uh, the EIA, the IEA and OPEC with their, uh, monthly, uh, oil reports and they, they each shave some, uh, demand, obviously from, uh, their estimates. And I just want to kind of, uh, look at those and maybe you can start with the EIA and, uh, you know, what, what did they do?
Well, of course all these numbers are modeled off. Um, I actually don’t know what they’re modeled off. I assume they took, they took, uh, SARS and maybe some, some previous numbers and then put them in, uh, in some kind of stooge and, but, um, what, what the EIA did, uh, was they said that in the first quarter, demand is going to take a 900,000 barrel a day hit. Uh, which is a pretty big number. They revised downward by 900,000 barrels a day, their estimate for global demand from just last month report. And in February they said in second quarter they said the man would decline by a a 400,000 barrels a day off of their last report. Then in third or fourth quarter, demand will a normalize a and a grow net. They’ve got demand up a million barrels a day for the year. So still, you know, not that bad of a, an increase if the, if these numbers come in and Andy, some of that hit that’s a, they’re taking, they’re taking in the first quarter is due to warm weather.
Yeah, that’s it. That’s exactly right. The Northern hemisphere is really not had much of a much of a winter. So I think some of that’s off the Corona virus and, uh, some of that is off, uh, is off warm winter. But again, you know, it, it’s just the model it looks like in reality, you know, certainly, uh, Chinese demand is being, you know, is being hampered quite a bit. Uh, if refinery runs, which is something that, uh, we actually can get a decent handle on and for finery runs in China are, uh, any indication of, of where demand is gem there. Those runs are down. One number for February was, um, 3 million barrels a day. You know, that runs for 10 million barrels a day relative to last year is 13 million barrels a day. I think some of the other numbers. So they’re coming in off China’s down like 1.1 million barrels a day on runs.
But, you know, I th I think at least for China, uh, on, on run cuts, maybe peaking, like right now it’s a big number. It’s, it is a huge number, but let’s get back to the big three. Um, OPEC, the, the OPEC report, they’re, they’re less, they cut demand less than, uh, what the EIA did. Uh, OPEC Scott demand, uh, down 440,000 barrels a day from the last month’s estimate in the first quarter, and then in the second quarter down three 70 and they think this year the growth and demand is a, was revised down by 230,000 barrels a day. Again, coming in close to the 1 million barrel a day number that, uh, the AIAA said many IEA, they really went, they, they said, uh, demand is going to be down on the year 365,000 barrels a day. Their estimated demand, uh, and demand will grow by 825,000 barrels a day, this, this year.
So that they really caught what they think for the, for the entire year. But all three, you know, seemed that seemed to indicate that this is a first half problem. Uh, and second half things will, uh, things will normalize. Of course, we don’t, not just, just a side point. Um, you like, do you like one of those reports more than the other or do you kind of just look at all three and kind of, I mean, in terms of accuracy? Yeah, terms of, uh, I think, well three, I think all three are, are worthwhile to, uh, to read and, and you know, it’s, it’s good to average some of their, some of their numbers because, you know, OPEC tends to go one way. The IEA tends to go the other way and the EIS models are usually not that great. So listen, it’s a hard task. It’s a hard task to actually, uh, you know, I know we’ve mentioned this in previous podcasts, but you and I attended a, uh, uh, presentation by the, the IIA about their models and that they were pretty, it was pretty intense actually.
They really work hard at their models. Yeah, definitely. It’s, they’re better than what I would put out, put it that way. So I read them. Yeah. So, um, so we have this idea that we’re taking a hit in February and March, and then it’s, then the hit starts easing up. It’s still a decline or is it client in April and, uh, possibly into, uh, may and then in June, I think things start to normalize and, and we probably, uh, probably start growing on that. Well, we should be, we should be growing or if we’re not, you know, it’s unlikely that these million barrel a day numbers are going to come, you know, growth of a million barrels a day are going to come to, uh, come to fruition. And, uh, you know, again, you know, we really don’t know, you know, whether this is going to, um, there was going to become, you know, a pandemic type of, uh, epidemic or, you know, it’s going to be, it’ll Peter out by, uh, you know, by the spring, which I think is what the market’s looking at.
I was going to ask you, you know, the market has come off really hard and now we’ve bounced in. Is do you think it’s, you know, do you think it’s a rational bouncer? Do you think that’s what, what do you think about, Oh, I think it’s a, I think it’s absolutely irrational balance because as much as these demand numbers are off, you know, we’re also seeing a concomitant loss on the, on the supply side. And I think that that’s one thing that we, you know, we had mentioned in our, wasn’t in our podcast, but in, in, uh, commodity research groups, monthly report, you know, we, we said we thought the market was giving too much, um, emphasis on the coronavirus and not enough emphasis on, uh, what’s happening in Libya and be as down to, they were over a million barrels last year.
What are they, what are they at now?
Like one 23, 123,000. They’re down in almost a million barrels a day. And you know, I think the market was thinking, Oh well that’s, you know, the short term that’ll, that’ll come right back. But you know, every negotiation has gone, has gone nowhere and it looks like conflict there is, if anything is, is still escalating. So yeah, these barrels can come out. Co can come back when the blockades are lifted, but you know, it’s not going to, it looks like it’s not happening in the month of February. And I’d be surprised, you know, it might not happen into March either. So you know, you’re, you’re losing a million barrels a day of sweet crude on the, on the market and the, and that has helped to um, soften the blow of the, of the loss of coronavirus demand as well as the, uh, as well as the warmer weather. So I, I do think, you know, where the, where say the AIAA one thing, I really disagree with it.
They were looking, they’re looking at a billion and a half barrel a day inventory built in the first quarter. And I don’t think it’s going to be anywhere near that. I think the, the inventory build is going to be, yeah, it’s going to be like less, I think it’s going to be around half a million barrels a day in the first quarter and, and you know, somewhere around that plus or minus in the, in the second quarter. And that’s a very manageable, it’s manageable. Yeah, because inventories were, we’re in decent shape. I mean there’s, look Chinese inventories are building for, uh, for crude and uh, you know, they’re probably building for, for products as well. But with runs being caught, you know, the, the, they’re not going to be built quite, quite so substance quite so significantly as we head into March and April. But yeah, half a million barrel a day build in the first, in the first half of the year plus or minus 200,000.
Yeah. It’s manageable. That shouldn’t be the end of the, yeah. That shouldn’t be like low 40 screwed. Right. I was gonna say we were for handle on crude isn’t, it doesn’t make much sense to you or just maybe maybe going down there and taking a look and then coming back up. Right, exactly. And that’s what we talked about, you know, and our monthly report, we said that, uh, we thought, yeah, there was a chance that WTI could take a look, see in the, you know, in the forties. But, you know, we liked the coming back. Um, and mostly because of, mostly because the balances aren’t as, as bad as, uh, you know, what the market was looking at. The other thing, Jim, that we, that happened this week is the sanctions that the Trump administration slapped on, uh, on russneft. Right. You know, that’s, that’s going to, um, you know, I would sound clear, Venezuelan production is probably around 800,000 barrels a day, but you know, that that ultimately too could have an impact on, uh, on their exports. They had been actually had been improving the, this may be, you know, this could be, you know, this could be a factor in there, um, you know, in the, on their exit on the export side.
And, um, why don’t we move into OPEC there. They were going to reduce production before all this happened. That are they, have they been successful? Uh, uh, with the additional cuts or, uh, from the December, uh, meeting?
Um, yes, because, because of Libya that as well or to OPEC are to OPEC producers, you know, so they sort of, yeah, I mean they ha now Olivia can come back, but again, it’s not looking like it’s coming back anytime soon. Russia has been saying, uh, you know, let’s wait and see what, you know, whether if we need to cut another 600,000, um, or we don’t. And you know, I think Russia’s being in the peace negotiations with Libya, you know, part of that, I think that they probably have a little insight information on the, you know, how that, how that’s going.
So, um, why don’t you lay out where, uh, inventory draws again for the, uh, first quarter and rest of the year. So you, what’d you say the, I think the, I think the first, you know, for the first half inventories we’ll build, you know, maybe half a million barrels a day plus or minus a couple of hundred thousand, second half. I think they, I think things will, you know, again, it’s hard to predict. I mean, think actually demand could really surge in the second half. Right. There you go, enough Chinese stimulus and enough, you know, the, their, um, desire to, to get the heck out of the house. Yeah. Get the heck out of the house. Exactly right amongst the population. But in terms of, you know, moving goods and, uh, you know, getting, getting things back to normal, you know, you, you may actually have a surge and, uh, you know, we, we could start that. We should, uh, start seeing a stock draw, you know, as we head into the third and the, uh, third and the fourth quarter, you know, again, we’ll see what we’re, we’re OPEC goes.
I think one thing that’s interesting and pretty significant, you know, they, they know that they somehow at some point have to get out of this production deal that they’re in. And we talked in our previous podcasts, you know, about the June meeting, what are they, you know, how are they going to get out of this and start increasing increasing production. But now you know, that they, now that demand has been hit and, uh, you know, Saudi is, I think was alluding to it as a, like a house on fire. Maybe there’ll be less, uh, less willing to, to really cut production or increased production, you know, as we head into the, as we head into the second half.
So, um, you don’t see any OPEC meeting before the ordinary meeting, you know? Well, if Libya comes back, yeah, I think they’re, they may, they may meet. If not, no, I think that, you know, they’ll just, or if things worsened, you know, if all of a sudden the cases start, you know, depends on the market. Shame is always right. If the market goes, if the market starts taking a real, a real nose dive and then we get into the low, you know, mid to low forties, then they will need, um, they may meet, I want to move into the, uh, U S oil production. And the, I guess when we were up at the highs, uh, there was hedging going on, definitely. Right. So, uh, so we probably shouldn’t see a decline in U S oil production or a decline in the growth from this move unless it stays down. Is that from this, this particular move? Not unless we go and back into the forties. Yeah, I don’t think so. You know the, yeah, I would doubt that you said they, they really took advantage of that spike. You know there were two spikes actually, the attack on Saudi Arabia and then I the killing of uh, Solemani right. So you had two chances, right? Yes. And um, what, what’s, where are we with production now in the U S [inaudible] you know, production right now this, this last weekly report had a surround had is 13 million barrels a day.
Yeah. He has us at 13.22 in February in their short term energy outlook. I saw that. Right? I don’t think so. I mean they pretty much flattening out for the rest of the year. And the 13 two’s 13 ones. Does that mean they don’t believe their own model cause going to get, I mean we look at the weeklies that are much more model driven and then we get, we get monthly. Is that true? Those numbers up right with the lag. Right. You know, are they, it’s kind of like there’s the weekly sort of survey, uh, which they then adjust to the, you know, they do adjust it to the monthly’s and um, the monthly is, or the goal are the gold standard, the monthly. So what you really want to pay attention to, but unfortunately the monthly are, you know, we’re, we only have November data, right?
It’s a month, right? Yep. Yeah. At the end of this month we’ll get December data. So that 13 to number you, you agree, disagree. I don’t see how, I don’t see where we’re in the second week in February. Now we’re at 13. Oh yeah. Maybe two months from now. The, the IAA, we’ll adjust it upwards, but I think it’s going be 13 and I think, um, you know, and I think growth is, is, is, won’t be robust this year. Can we get to 13 to 13? Three yeah, we, we, we could, but it’s sloughing like, you know, it’s nothing like what we saw last year. Again, as you and I have discussed in these podcasts, you know, Mo, much of the year on year growth has already happened. Right. In a way. Right. The way the math did it was during last year and now when you’re going to last year, the first half was low.
So you know, these numbers are going to look good relative to last year. Right. You know, in the fourth quarter we really surge. So relative to like where we were in December 1st all look good at all. Yeah. And I shouldn’t say that. You know, we’re growing, he’s a slump. Some people have production falling this year, June us production falling, so that, so this, um, this EIA number is definitely not a consensus that they’re totally not a consensus. I saw one number, I think they were talking about production going to 12, six this year. Oh boy. I don’t, I don’t think, you know, I don’t think so. But that’s one of the numbers out there, which would obviously would be constructive. Well, even even if you have a particular a presidential candidate or two, winning and banning all kinds of fracking, that won’t happen till next year. That’s what happens if it happens.
That’s another plague that we could talk about that some of these candidates are talking about, you know, banning banning fracking and the one candidate is talking about banning us crude exports. Could you imagine it would wreak havoc for sure. You know, and I think on the exports that that’s, that’s an issue that he’s trying to get an executive order, right? Yeah. So you don’t have to go through the regular channels go through through Congress and in terms of banning fracking, you know, and I don’t think there’ll be an outright frack ban, but I think it’ll be something like banning fracking on the federal lands. And if that’s, if that’s the case, then you know, that’s like a million and a half barrels a day.
I didn’t realize it was that much. Yeah. I mean this right to say nothing about the lateral gas, you know, we, we fracture for natural gas production, right? Yeah. But this less natural gas for the auction on federal lands, much less right. Than there is, um, you know, for crude, well, as, you know, we can’t get any more natural gas into our, uh, state of New York as we, we don’t, we can’t build any pipelines. Right. Right. So moving along into the, into the springtime gasoline is what the heck’s going on with gasoline. It looks like it’s a, well, it cracks have really rallied big time, uh, here in the U S not globally, but ah, globally. There they’re better. I mean, refining margins are, they’re not terrible here in the U S the Bannon in Asia, I mean there and then the med horrendous, you know, they’re horrendous and uh, yeah, demand this, you know, Eastern hemisphere demand is poor.
And, uh, in the med, you know, you lost all those Libyan barrels, right? So crude price, you know, the, the differentials have gone crazy and demand is kind of soft. But here, you know, we’ve had refinery, we’ve had refining issues. Big wall. We lost, uh, Exxon Baton Rouge had a 500,000 barrel a day. Refinery went down. Um, the, the, the a C the crude units were an int Warren injured, probable probable, they weren’t damaged three or four weeks. If that’s going to be down, we’re going to turn around. Uh, we, we did have a decent demand this last week and this seasonality, I mean, this, all this stuff gone. There’s some decent things calling off for gasoline. However, you know, inventories still are, you know what Jim, if the Tories are around average for gasoline, for gasoline, the inventories are 259 million and the four year average is 256 million and day supply or right, or the same 29 days.
So we’re okay on gas. Um, but certainly, you know, it’s making a big move relative to diesel. Just going to say diesel. What’s the price? Action is awful. Horrendous. Is it, do you think people kind of, um, bought ahead of the, uh, IMO 2020 and they’re just totally showing up as weak demand? And they’re just working off. Totally. I think that was that. I think that was, you know, big spec position right. By everybody. You know, really probably shouldn’t even be in oil, you know, training oil. But they read this stuff and they go, Hey, we kind of get in this and you’re not how it works. We’ve been seeing it for 35 years. When I tried, I was trying to think about how do you think about this virus when, when you hear the news that okay, the virus is going away, it’s too late to buy any, you know, it’s like you have it, it’s just the markets, uh, make it very difficult.
And for people there is some efficiency in, uh, you know, in markets, you know, it’s, it’s, you look at the equity market that they’ve shrugged off the, the, but you know, we’ve had real effects. I mean this is a, I mean it really is, you know, Chinese demand is going to be as significantly down, right? So that at least there is, you know, there is a real effect, you know, the, the market is does into at least the oil market seems a little, maybe not. I mean there’s, there’s that app that everybody has showing the death count and the cases. Right. And if it grows, you know, if the, if the crazy, it’s crazy, you know, but these algorithms are trading on it. So, you know, that’s something else they had of it. Yep. But let’s get getting back to diesel diesel, you know, that’s the other thing that the weather’s killed, right? Yeah. I mean we still burn heating while here and in fact chip it did my heart very well. I read my heart skipped a beat when we were up at global headquarters. Yes. Right. Coming right down the street was a, it was a heating oil tanker truck. Right? Yeah. That was the hose. So you know, we still use it.
Well, yes, I still have heating oil and UFE to go out. Right. There’s not a lot of distributors left, but uh, get good service. Okay. So we had this move up and then a move down. And, um, I’d say I want to talk about options a little bit here. And we’re running around 31%, 30% run the first two months. Vall and we had gotten up close to 40% on 40, I think February 3rd was, was the high. And, um, you know, there, there’s, um, the, if you look at the open interest, it’s not crazy. It’s very spread out and it looks like, uh, you know, you look at June where, where’s all the open interest? It’s in the, uh, June and December, say 45, 50, 55 puts some 30 fives. And then in the calls it’s 60, 65, uh, 70 with some 55 and 75. So that’s also also June and D. so it’s not really, it’s not really an interesting market. I don’t, I don’t think it’s M and a CSO, same thing. Uh, you know, we, we’ve, we see a flat puts our, the, they have about 10,000 open jurors on the June through DCE, uh, spreads. And, um, from April, may, June, July on the calls, it’s the plus 50 plus 100, uh, CSO and these were putting on, I think these were put on a while ago. So, um, not a lot. Not a lot to say. Just one of the get people updated on that.
No, it’s, it’s w we also need to talk about the curve. Yeah.
The, the crude curve seems to have, uh, it’s, it’s, um, in contango up through July and then it goes backwardated is that, is that right? Is that the way you see it? That it goes, um, I didn’t see what happened today, but it was say, yeah, yeah, yeah. Right, right, right. It’s in contango in the front. Yeah. And then the bat. Yeah. And then it goes, uh, and then it goes backwardated, but June, July, June, July and August have about the same price. Yeah, I think so. I think that’s right. I haven’t looked at the close today, but I think that’s, that’s about right. Yeah. So, um, it’s kind of, that’s, that’s where people were thinking, we get back a little, get back a little closer to normal. Yeah. And I think that what’s, you know, there are a couple of the, what’s really interesting is the Brent market, not surprisingly, because we lost all that sweet crude, uh, you know, the Brent went from contango to a pretty good backwardation now in the, in the, uh, front. And, uh, actually the whole curve pretty much, you know, went, went, uh, went backwardated and you know, what, what was everyone was pointing to, um, particularly on the, um, know a lot of commentators in the press were talking about, uh, how Brent had been in contango and how bearish that was and that the end of the world was nigh. Yeah, sure enough market like picked itself up and, uh, you know, said wait, you know, we don’t, we need some, we’re missing these fouls.
So, um, let’s talk about prices from here. Went around w deputized them on 54 or something right now. And I have a screen in front of me, but I’m 50, 53, 87, so let’s call it 54. Okay. So what do you think going forward? I’m putting you on the spot cause great, thanks. Well here, here’s what I think. Yeah. Here’s, here’s really what, what I think, I think, you know, if you look at, this is actually a pretty good stat. The five year average for WTI is around $53 prices. Five year. Yeah. Geez. Yeah, we’ve done nothing. We’ve done nothing. That’s like the market’s been all over the place, over the last, you know, over the, over the last five years. And you know, including taking some heavy, you know, heavy pounding and then of course, and then coming back and then, you know, a couple of spikes here and there. But gee, I could’ve sold volatility all those years ago. You could have getting, don’t do it. Don’t do it. Don’t do it anyway.
If you want to say the mid fifties is an equilibrium price, WTI, you know, I don’t think you’d be far off. So you know, where, where are you go from here is, you know, I, if I had, I think we’re going to, I think the market as we head into the second half may, it may get itself together. Uh, and we, we could see some upside, you know, could there be a six handle on WTI? Yeah. The, the, you know, there definitely could be, could there be of low forties? Well, if the virus gets worse, uh, I guess, I guess so, but you know, I, I think you look, you look at the inventory numbers and for now this, this is a good price. So what do you do with that? You know, this is, this is really a good price. And one thing that has been really interesting, Jim, for a us hold out fundamentalists and don’t tell anyone that I’m secretly a technician, but no for this hold out fundamentalists, the prices have actually been correlating very well with inventories and you saw in the fourth quarter, you know, even the global inventories for drawing and that’s what that rally was all about.
You know, uh, as, as we headed, as we, you know, we had a nice, a good solid fundamental rally in the fourth quarter. Wow. That got taken out by the coronavirus. So, all right, if stocks filled, yeah, maybe the market could be, you know, under some pressure here. And then in the next few, you know, next few months and then as we head into the second half, you know, you could start seeing it, gaining its footing and uh, you know, and coming on back, I think a collapse, a price collapse, uh, looking at looking at all the fundamentals. I, I, I can only see that if this thing really, if the virus becomes a pandemic. Right. And that’s, you know, it’s, we think you think that’s a less likely outcome, but we really don’t know. We don’t know. No. But yeah. You know, neither the way you know, it seemingly neither does anyone else, you know, maybe the experts have a better hand.
They certainly, hopefully they have a better handle on it then you would me, you know, two oil guys, you know, or the guys on TV, they don’t know either. No. Okay. So in gasoline or diesel, which, which one has a better, uh, if I may. And I said you have to buy one of them, which one would you buy? You’re giving me like the Widowmaker choice gas choice. All right, good to go. Um, I think diesel will do somewhat better than, than gasoline over the next, uh, over the next couple of months. You know, we’re heading into it is planning season. There’s always a shot for the end of the season, you know, an end of the season called snap. Um, you know, if China starts, if things start moving out of China, you know, diesel demand presumably should, uh, you know, should pick up. So, yeah, I mean it’s fighting seasonality somewhat for, uh, for gasoline.
But there’s also a counter seasonal rally for a desolate, that’s usually, you know, March, March, April ish. Okay. But the one thing that, uh, I would advise anyone listening to this podcast is never trade heat to gas. Right? Yes. Which is the, uh, you know, one of the great widowmakers says is a, I think as shown again, the March, April natural gas. Yeah. The other way. The other way. Yeah. That one right on there and the another Widowmaker.
Yeah. Okay. Andy, good job.
Anything Commodity Research Group.com is us. Check us out. What else? Anything else, Andy, you can reach us at firstname.lastname@example.org. That’s my, that’s my email address. Jim’s is jcolburn@commodity research group.com. And if you have any questions on this podcast, feel free to reach out to us.
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Okay. Thank you very much Andy. Our next podcast, we try to do them right around the time when the big three come out. We were a little late this month, but we’ll be on track. We should be, should be on track, but next month. Right. And I think over the next couple of months we’re going to have some great, great guests, guest stars on our podcasts.
Sounds great. Thanks Andy.