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 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.
We would like to thank our friends at EKT Interactive oil and gas training for hosting this podcast. Check out their newsletters, podcast, 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 sell or buy any derivative.
Today is February 17th. Good morning, Andy.
Good morning, Jim.
I was, uh, looking at, um, the EIAs, uh, monthly short-term energy outlook. And, uh, my favorite chart in there is their notable changes. These are, uh, revisions from their previous month, and it, it showed that natural gas prices from 2023 were lowered by 30.5%, and this is in one month period. And, um, the jet fuel margins were revised up by 18.7%. And, you know, we have a tremendous amount of respect for the analysts at the eia. And I, I br I bring this up only to, to kind of underline what we’ve been talking about for a while now, and that’s how difficult it is to get your hands around these markets. So, I’d like to talk about the, start off talking about the three, uh, the big three, um, short-term energy outlooks that, uh, we focus on the opec, e i a, that’s the us’ uh, department of Energy’s, uh, analyst, stats arm, and the I e a. And when I, when I look at the demand, they show for 2023, uh, OPEC is that plus, uh, 2.3 million barrels a day. The I e A is plus two point, uh, zero million barrels a day, and the EIA is plus 1.1. So that, that’s a huge, uh, diversity in in, um, just on the, on the demand side. And, um, why don’t you, uh, comment on that?
Well, Jim, uh, I I think we should also add the, uh, maybe not the big four, maybe, uh, mid-major for the, uh, C R G balance sheet as well. I guess, you know, we’re, we’re not blue bloods, but, uh, you know, we also do our balances. And I think as our listeners know, um, you know, our balances tend be, uh, a little bit closer to where, you know, the closer to being correct. I mean, yes, for to be, to be blunt, yes. But, um, and what, what we’re looking for on the demand side is somewhere in the middle, uh, uh, we have up 1.55 on million barrels per day on, uh, demand, which, um, you know, what I feel, I feel pretty good about the EIAs number. You know, they’re, they’re looking for, I think, um, more of a slowdown in the first half economically.
I think they, they have, uh, negative growth for the, for the first half of the year, um, in, at least in, in the us. So I, I think that their economic outlook is influencing their, uh, demand outlook on, uh, OPEC and well opec their, um, you know, in one way they’re talking to their book showing that big of a big of a demand increase. You know, that that’s gonna be good for, that’s gonna be good for opec. But I, I, I think that’s, you know, 2.3 would, would really be, uh, would really mean that, uh, the economy is humming, the global economy is, is humming along. And, uh, China has come back in a, um, you know, in a big way, which also is what the I e A is talking about. I think the I e A has China up, I think it’s close to a million barrels a day.
Uh, we’re, we’re like 0.7 on, uh, we’re 0.7 on China, but is is a million barrels a day possible? Yeah, yeah, sure. If, if they can, uh, crank it up in the, in the, uh, second half. And that’s based really on jet fuel, uh, with the theory being that, um, China savings rates have been pretty high during the, you know, during Covid V. And, uh, now they’re ready to spend and travel similar to what we saw in, uh, in, in the West after Covid was, was deemed just about over, as far as diesel is concerned, probably less of an increase because the, the thinking there is manufacturing, uh, is gonna come, come on later. And we probably see more of, of, uh, you know, more travel, uh, and that, and that’s gonna be the big, the big driver. And, and the, the I e A, they made a big mo. I mean, they made a big correction they were looking at in their last monthly, or maybe it was in November monthly, they were up 1.6, so they added 400,000 barrels of data, their, uh, demand estimates. And, um, you know, that that’s a big hike. And it was, uh, probably all on, all on China.
Yeah. I, I’m looking at their jet fuel number. They’re looking at, uh, plus 1.1 million a day, uh, up to 7.2, and they’re, uh, saying it’s 90% what they had for, uh, 2019. So that’s, that’s, uh, kind of odd to see a jet fuel being, you know, front and center in terms of, uh, uh, what’s 1, 1, 1, uh, sharp, uh, demand driver there. But, uh, can you, I guess, uh, so it seems that people are, these three groups are looking for the second half of the year, uh, for demand to start, uh, rocking and rolling a little, little more. And, um, I don’t see it, I don’t see it in the, you know, we, we continue to see, uh, some of those $1 strike call spreads trading, not as actively as we did say, you know, in 2022. And, um, there’s still some that are left on I’ll, maybe I’ll get into more details later, but are you seeing any people putting on trades for, like, is it showing up in the crude curve or anything like that, that, you know, the, the second half of the
Years, well, years, the crude curve? Not, not really. I mean the, the crude curve, yeah, it, it was at least on the Brent side pretty well. Ba you know, it’s the backwardation on, uh, Brent and in, in w t I really steepened in, uh, in January. But now as we move into February with this, these monster crude builds, the, the backwardation is, is definitely, is softening a lot in both curves. So, um, you know, I think that yeah, there was expectations for, uh, for second half you look at, at the big rally, let’s say, and just d shred D said, uh, we’ll take a vanilla one. December 23 versus December 24 really rallied significantly in January. And, uh, as I said, it, it, it’s come off now. So I think that given what’s happened on the commercial crude on the US crude inventory side, you know, that trade is being reevaluated seriously, being reevaluated. Well,
I mean, this is a good time to talk about the, uh, weekly, uh, balance numbers that came out showing a 16.3 million barrel build in, in US crude oil stocks. That’s a pretty hefty number.
That was a really, uh, surprising number to say, to say the least. The, the big number there, and, and this is important, was the, their balancing number. I th I think it was something, it was over 2 billion barrels a day to, to balance. What, what the EIA does is if all the variables like crude runs and imports and exports, uh, SPR releases, if they don’t add up, uh, to what the crude stock number is, then they, they will put in a, a number to balance. And last week it was, it was monster. Uh, but the thing is that what’s probably correct is the crude stock number, right? And I think the market was, was very cavalier when the number came out and they said, oh, it’s, it’s just the, you know, it’s just the balancing number. It doesn’t mean anything, but it means everything because it, it just means that the production or the imports or the exports or the crude run numbers, those are wrong.
What’s probably right is the stock number. So we did build 16 million, and I think some of the off here that we’ve seen later, this later this week, you know, uh, Thursday and Friday, and particularly today, Friday, uh, February 17th is part and parcel of that, that big build. I mean, at the end of November, us crude stocks were 426 million barrels. They’re now 471 mm-hmm. Million barrels. So we’ve built almost a million barrels a day here over the last three months. And if you look at US crude stocks, you know, we’re in surplus. Mm-hmm. Uh, we’re at 471 million barrels. The the 2015 to 2019 average, which is pre covid, and it’s what we like to use for somewhat normal numbers was, was 446. And in terms of day’s supply, we’re running like three and a half days over the, over that average. And yeah, I, I think we’re at, you know, if you, if you look at where we’re at, we’re in good shape now, you know, stocks will draw as runs increase, but you know, it is, it isn’t, it doesn’t look like there’s gonna be any near term shortfall what so whatsoever on the crude stocks, uh, on us crude stocks e except for, you know, we’re gonna draw when runs increase in, into, in eight, you know, April, may in second quarter.
Right. So I, what I was gonna say is it looks like we built stocks maybe a little early for the seasonality, and we, we still have, we still have to go into the turnarounds or, I mean, run runs are gonna go right, gonna go down going forward, right. For the next few weeks.
Yeah. Next few weeks runs are gonna, you know, right. The runs the four week average is like 15.1. Let’s say 15 they’ll go down. Yeah. Not a lot. I mean, we’re already down because we had all the, uh, refinery issues from the Christmas freeze out in, uh, the Midwest and the, and the Gulf Coast. So that, that’s a big reason why we’ve built so much is those, those refineries, some of them didn’t come back. And plus there were other refinery problems in the Northwest California, upper Midwest, Rocky,
Rockys, right. We’ve had, you know, we’ve had refinery issues galore, so we we’re, we, you know, we were nowhere near where we should have been on crude runs in Janu in, uh, January and February.
So does that, do you think that shortens the, um, or, or, or, uh, just moves the turnaround season back a little bit? So, uh, typically they start coming back in, in March and April. Maybe they come back a little earlier this year. Do you think that’s possible that we’re just seeing these builds in crude a little early than, than normal, and it’s not that, um, and, and we’re gonna see the refineries come back earlier than normal as well,
Or not? Yeah, it’s possible. You know, it depends on some of these refineries that didn’t come back, you know, how much work they did while they were, while they were down. You know, one, one big problem with turnarounds is, is trying to schedule crews to come in and main, you know, the maintenance crews to co to come in. But yeah, I, I think that’s possible that we do see, you know, crude runs inch up a little, you know, maybe a little bit faster in, uh, in March and April, you know, that they should peak in in, in May and June, assuming everybody comes back, they should be like, may, may and June should be, we’re, we’re at 15 now, say May and June, we should, we should be pushing 17. Um, and during, you know, and then we should be drawing, you know, we should, we should be drawing stocks, but we’re drawing the, the key is we’re drawing stocks from a pretty high level.
Right? So, so we talked about this, uh, off the air before we get on it was, um, the possibility of the market breaking down. We’ve been in kind of a trading range for a while now, and it’s kind of the scenario nobody’s looking at, you know? Right.
Oh yeah. I think that, you know, there’s been so much bullish sentiment by just about everybody, you know, particularly the banks have really been banging the drum for, uh, much higher prices. I noticed that they, um, you know, most of ’em are now lowering their estimates, uh, rightly so. But I think you’re right, Jim. The one thing people, I think if it broke down through 70, you know, that would really blow a lot of people’s minds and their trading positions too <laugh>. Cause you know, the market’s, the market’s definitely leaning long.
Yes. I, no question about that. So that’s a, I was thinking the other, uh, scenario that doesn’t seem to be getting much play is what happens if we have like solid, solid growth and inflation coming down. So we had, we had some, uh, bad PPI number yesterday, but, um, it’s one number, you know, what, what happens? People talking about soft landing, hard landing inflation, longer, higher, but what if we have a <laugh>, a Goldilocks moment where we get two, two and a half percent growth and a trend of inflation coming down? I, I don’t, I don’t think that’s in the, in the cards, but I, I don’t think it’s in the, um, the chat that I listen to or read on in the, in the news. But the, the, the, uh, Atlanta Nowcast GDP nowcast is, is for, for this quarter, first quarter is at, uh, two and a half percent, which is, you know, basically the number, the numbers are quite good so far, and that’s, that’s the US So, um, yeah, we’ll, we’ll see, we’ll see what happens if always like to look at those least talked about scenarios, because those are oftentimes the way to trade this market.
You know, that’s a way to kind of, if you can, if you can make a case for it and nobody’s doing it, and it’s, it’s got, uh, uh, it, you start thinking about it more and say, okay, let’s look, this is a possibility. So
Yeah, I think if, if that’s, if that scenario comes, comes in, then, you know, OPEC is gonna be closer to the, to the pin on their, uh, you know, and their demand estimate OPEC and the, the I e A, uh, cause that’ll be, uh, that’ll crank out, you know, that’ll be, that’ll those, we should see some decent demand numbers at that point.
You would think if the, if opex looking at plus 2.3, and, and again, that’s the, the monthly report that bunch of excellent analysts put out. It doesn’t mean that, you know, the OPEC members have their internal numbers the same, but let’s say that they, they agree that, uh, growth is gonna be plus 2.3. You think that makes ’em more likely to, uh, to increase, uh, barrels into the market or they No, they sit back and wait.
I think they sit back and, and, uh, wait and, and, you know, take the price. The, uh, Saudi minister basically said the other day that, uh, he thought that the, the agreement, their, their last agreement was good for the year, that they weren’t gonna make any, uh, you know, any, any changes. And I, I, I think most analysts, um, you know, are looking at, I know I am just looking at opec production is pretty steady, you know, the number I put in, in pencil, but, you know, maybe I’ll put it in more in pen <laugh> is, uh, an OPEC production of around 29 million barrels a day, give or take. And, you know, I, I think that’s a, the number give or take a couple hundred thousand barrels a day either way. And then, you know, I think that’s a number most everybody’s plugged into their, into their balances. You know, if things I, I think if prices, yeah, I guess if prices got into the tail that you were, you know, the tail regions you were, were talking about Jim, yes. Yeah. Maybe they, maybe would, they would, uh, reconsider, you know, if the market really broke down, you know, they might, they might reconsider, I mean, I’m sure they’re not happy that Russia just announced the 500,000 barrel a day cut and the, the market basically went up a little and then went, you know, has gone down
Below that number. Yeah. So why don’t we talk about that. Uh, what’s, what do you think, how are you reading that 500,000 barrel cut in production by Russia?
Well, you could either look at it, I think there are way, there’s certainly ways to look at it being a inveterate barrel counter. You know, I only look at, I look at it not that I discount the political, uh, which I’m sure is a, is a key, you know, maybe a key is a key element cuz there could use that for any propaganda that they, you know, that, that they might want to. And indeed they did after the announcement saying they’re going to, you know, this is, this is to punish the west for the price cap and blah, blah, blah. But commercially, you know, they may, they just may have problems, uh, moving either the crude or either crude or, or diesel. And, you know, the, the, there’s been reports that, uh, that they don’t have the ships to move some of the barrels. They, they, um, you know, the mark, whether or not the markets are gonna, can take more or less or take the same amount of crude, um, unless it’s heavily discounted, is, is, uh, is another factor.
And as I think we spoke about last month, you know, there’s the diesel factor. Where are you gonna move your diesel? Last year they average to the, there’s now an embargo on, uh, EU products, on Russian products to the, to the eu, full embargo. So, you know, the, their main product, the most important product is diesel. Last year they exported like, let’s call it six 50, 700,000 barrels a day of diesel to, um, to the eu. And, uh, in January to the, to the uk. They really cranked it up though in, uh, December and January, they were up like a million barrels a day of exports before the, um, before the embargo. So let’s, you know, even using seven 50, they have found some mar it looks like they’ve found some markets in, uh, the Middle East, you know, to, to export to the Middle East and Africa, north Africa.
And for the Middle East refiners, you know, they may be able to rebrand that Russian de, you know, the Russian diesel rebranded as non Russian diesel and, uh, export it back to Europe, which is kind of ironic to say the least. Uh, and they’re, they’re moving to Africa. Whether or not they’re gonna replace all of it is, is unclear. The market’s, you know, the market’s waiting, that’s a wait and see and whether they have the ships to replace it. And if they don’t replace it, then, you know, you’re looking at crude run, possible crude run cuts. So, um, you know, so that 500,000, some of it may be commercial and they use it for political, you know, they’re using it politically. Uh, interestingly, last in the fourth quarter, Novak, the Russian oil minister said that, you know, he thought that 2023 Russian oil production would be down from 500 to 700,000 barrels a day.
And, um, that’s sort of the number we’re using. Jim, I have in my own little barrel counting machine, you know, I, I put Russian production down like, you know, six 50, uh, others or more, you know, others are like over a million barrels a day. Like the i e A is I think over a million barrels a day. I think the i a is rev Russian production going, going down. So, you know, there’s so obviously there’s a lot going on on the flow side. Yeah. And traders, or traders are carefully watching what’s, what’s going on.
What’s interesting, I, I, uh, I guess from last year, i e a originally saw 3 million barrels a day of Russian oil shut in. I’m, I’m pulling this off a news, uh, product. All I saw. And now they, they in, instead they use the word some, you know, some oil will be shut in. So, uh, yeah, it’s, again, that’s a, another difficult, uh, num difficult numbers to get, get around. We’ll have to see how this, uh, sorts out. I did, I did also read that, uh, some Russian oil got processed in China, and the diesel that came out of it ended up in, uh, the us. Um, so I don’t know if that’s true or not, but it’s, um, it, it shows you the complex, uh, trade roots that are getting, uh, disrupted and, and changed and, you know, because of the embargoes.
Yeah. The, uh, they’re, they’re definitely, they’ve been able to export some, uh, fuel oil, export fuel oil to Asia, maybe China. And it, it’s, uh, you know, it’s being upgraded and into a, uh, lighter product. And it’s certainly, it’s certainly possible. You know, you look at all the Russian oil that, uh, India’s been taking, you know, no question. Some of the products that they’ve been exporting to Europe has, you know, has the, the products, the, the rush, the products as a result of that embargo, crude, you know, is ending up in, in, uh, the eu.
And that was, that was the intention of the, um, uh, the price ceiling as well is right, is to keep barrels on the market. Don’t, not, not dis don’t disrupt oil markets, as, you know, price wise and, and, and, uh, and yet have Russia sell their oil and products at deep discounts. And, and is that happening?
Yeah, it worked amazingly <laugh>, you know, a lot of, a lot of almost everybody was going, this is unworkable, this is crazy. There shouldn’t be any price cap. But yeah, so far, so far, I think you have to give credit to the, uh, architects of that, cuz it, it’s, it’s working.
And, um, let’s talk about diesel. When you look at the US stocks, we see, um, gasoline has moved forward that, you know, stocks have built, um, diesel still, even though it looks like a slight build, it still looks like it’s closer to the, uh, five year average low as opposed to the five year average high for crude and, and gasoline. Are we still in a shortage here? Or tightness? Or, or the cracks have come off,
But Yeah, the cracks have, right. The cracks have really come off and, you know, thanks to the, thanks to the non winter that we’ve had, yeah, we, we had talked about, you know, we had talked about a possible shortage in, in, uh, new England and, and, uh, the middle Atlantic states. And that’s not gonna happen now, uh, even if we have a freezing, you know, freezing march in April, we’re, we’re through the worst of it. And, um, you know, I think that you’re right though, Jim, the, the dis distillate stocks are still a little bit, are still low. I mean, they’re, they’re still relative to four, relative to five year averages. They’re, they’re low and days supply. They’re like six or seven days, uh, days low. The, the one thing that isn’t low though, if you look at, uh, Atlantic Basin stocks and you throw in Europe because of the, you know, perceived the, the loss of, of Russian diesel, and it’s a big, you know, it’s a big hit, uh, obviously prices rallied significantly, but, and everybody sent diesel, including the Russians.
Uh, everyone sent diesel to Europe. And so Europe is in now in pretty good shape on diesel. And what it’s gonna mean is if we, if we do have a big, you know, us rally, the Europe, Europe, ironically is <laugh> could be sending, uh, you know, could be sending some excess, uh, over here to the, over to the, uh, us. It’s not over yet. We’re going to planting season. So diesel, I think out of all, you know, out of, uh, crude gasoline, you know, where diesel is definitely the one to, you know, the one to watch for any, uh, any bullish notes. Certainly, uh, if the, if the economy remains, you know, the economy was hot in January and probably a little hot in February, but if it remains hot, that’ll help on the, on the, uh, on the demand side, the demand is disappointing, I’d say not as bad as gasoline, but, um, you know, still, it, it’s running like 3.63 million barrels a day. The last four weeks average is probably like 3, 7, 5, 3 8, something like that. Uh, last year. The EIA is also looking for diesel to be like unchanged this year on demand. Uh, same with gasoline. I think they may be too high on gasoline. I mean, gasoline demand is a big, you know, that, that’s a big factor. US gasoline demand is a big factor.
Let’s talk about that. What’s, what’s it, what, what’s your, what are you thinking for, uh, 2023?
I’m thinking that the e i A is may, yeah, we may end up behind last year on, uh, gasoline. You’re seeing like miles driven and demand begin to decouple, you know, there used to be in lockstep and, uh, now, now they’re decoupling. And I think there are certainly, yeah, just, uh, right now, the four week average for gasoline, we’re, we’re outta season obviously, but it’s eight three, if you go back to that 20 15, 20 19, uh, average that I described it, it’s uh, 9.05. So you’re, you’ve lost 800,000 barrels a day of gasoline demand since, you know, since the peak years. You know, I think, and I think those are gonna be the peak years, Jim. I, I think gasoline demand has probably peaked in, uh, in the us The, there’s a lot of factors. You know, obviously the work from home is, uh, is a big factor and, and what’s gonna be the big fa you know, the biggest factor going forward over the next five to 10 years is gonna be EVs. And I, I think, you know, we’re seeing it in the, in these numbers. I, I think the ev uh, ev adoption is probably leading to, you know, a hundred to 200,000 barrels a day. Lost demand so far on, uh, gasoline, maybe more, maybe somewhat less. But that’s gonna, you know, that’s not stopping. That trend is not stopping.
No, I, uh, I bought a hybrid. I love it. And it’s, it’s not an ev but it’s definitely the, uh, gas mileage. I, I don’t have to fill up as much as I, I notice it, you know, I notice I don’t have to fill up, I mean, I obviously, I’m talking about driving around town and, and, um, yeah, it’s, it’s, it’s unbelievable how much fewer trips I make to the gas station now. But, um, yeah. I, I, and is this, I’m not sure this is the first time you mentioned EVs sort of, uh, en entering your, uh, calculation on gasoline demand. I think for a while you said it was their, you know, you could see their, their sales were increasing by a lot, but it wasn’t a, a big factor in demand, but now, now you’re saying it is.
Yeah, I was saying it over the, over the last few years, cuz it wasn’t,
No, you know, now, you know, 2022 and what we are looking at for 2023, it is. So I am putting it in there and, um, you know, and each year ev sales are going to increase as more competition, you know, besides Tesla. That was the other thing. I mean, it was basically Tesla or nothing. And, um, you know, as we go forward, it, it’s gonna be a bigger and bigger portion, not only here in the US but you know, it’s already a big, you know, a big percentage in, in China. Yes. Um, and we know Norway is a, is a big percentage, not a big user, but Yeah. You know, and government is, is, you know, it’s right there
Going that way. Yep, yep. Yeah,
It’s going that way.
Not sure I would want to do it if I was in, uh, Minnesota when it was, uh, what, minus 30 degrees
<laugh>, right? Yeah.
But, uh, yeah, I think it’s, I think you’re, we’re seeing it in the numbers and, and they are having it affected for sure.
Yeah. You can’t ignore it, you know, it can’t be ignored anymore, you know, besides the, you know, the economic and the, you know, the work from home, I think ev is, is now, you know, factor.
So if, um, let’s say that demand doesn’t come back in gasoline for refiners, how much tweaking can they will, will they tweak to make, you know, run diesel like it was, uh, wintertime and not, you know, not a summer driving season? Or is it not quite there? You know what I’m saying? Is it,
I don’t think it’s, yeah, I mean, I don’t think it’s there yet. I mean, they could tweak as best, you know, as best they’re, they’re able, depending on the type of crude they run, you know, and what they can do with, uh, feed stocks, et cetera, et cetera, to make more, make more diesel. The, the key is that what, what is gonna happen is the, for gasoline is just gonna become more and more of an export market. Mm-hmm. <affirmative>, um, you know, and then us refiners gonna have to look for growth, you know, whether it’s South America or, or it will probably be, you know, there’ll be more exports to South America and we’re going to, we’re gonna be competing globally for, um, for growing, you know, where gasoline is, is, uh, is growing. And probably that competition is gonna put some pressure on, uh, margins.
Not yet, not yet. But, you know, as, as we go forward mm-hmm. <affirmative>, um, you know, gasoline’s gonna be, gasoline’s gonna be the product that is, is going to be as, as I said in the probably the most, most competitive diesel still should be, uh, diesel and Jet, you know, ultimately diesel too, but not, not right. You know, not right this second because they’re trucking and rail. Uh, but so it’s gonna be, it’s gonna be a challenge for, um, you know, for us refiners particularly since the new refinery capacity that’s coming on is, you know, the, the, they’re, they’re modern refiners. They’re modern refineries Yeah. Coming on in Asia. Right. And, uh, we’ll see if that Nigerian went, went in, if the, there’s a 600,000 barrel a day refinery ready to go in, uh, Nigeria, but it hasn’t quite opened yet, so we’ll be watching. Yeah. You know, that’s, that’ll, that’s another c you know, that’ll be a competition for the Asian and, uh, European refiners.
Uh, just a, I want to get a couple questions in before we, uh, get to the, uh, prices, but, um, the SPR is releasing another 26 million barrels. I think the SPR is at the lowest, uh, amount of oil since 1983. Do you see that as an issue?
It’s become a political issue. <laugh>, everything’s political issue commercially? No, I don’t think it’s a big issue. I, and this is, this was already approved. This isn’t part of the emergency release. Right. So, you know, th this is just to use for pro, you know, co I think Congress wanted to just to help balance the budget. So, uh, I, no, I don’t, I mean, it is not a lot, it’s 300,000 barrels a day. So
If, if they wanted to balance the budget, they should be trading the curve.
They should be, of course they should be trading the curve, but
It’s like a bunch of layups over the years.
Oh my God. But Jim, yeah, you, you fi find me the, uh, politician who’s gonna recommend that.
Right? You, I don’t, I dunno if you remember what talk, we, I, I did a talk in the eighties to the oil producing states on how to use options to hedge, you know, their, their, uh, their, their, their revenues for their budget. And, um, it was really interesting because I did get that comment afterward. They said, who, who do you think was gonna step out and say, uh, let’s hedge some barrels? And and nobody’s gonna do that. So Alaska might have, might have actually done a pilot program. One of ’em did a pilot program, but I’m not sure.
Well, I, I spoke to Alaska also in the eighties. <laugh> Yeah. About the very, about the very same thing. Yeah. And, uh, you know, afterward, after my, they had a couple of guys talking about it, and after the talk was over, we repaired to the, the local restaurant and, uh, the governor happened to be there and he put his arm around me and he goes, that was very, very interesting, Andrew. I doubt we’ll ever do something like that. But that was, that was, you know, that was interesting.
So I, I had, uh, I think I was in a place called, I did my talk somewhere in Colorado. I think it was like parachute, is that a, it’s, uh, my, my memory may fail me, but we, we went on a tour to, um, a Unico project in the Rockies to extract oil from the shale rock. And, um, so this would’ve been 19, maybe, was it 87, 88, something like that, I think might have been 88. And, um, they were telling me that they’re about to shut it down cuz it’s, you know, we don’t, don’t need it anymore. <laugh> Yeah. Times as, as we get into these cycles, we talk about, you know, um, the, the other one I wanted to ask you, Andy, um, before I ask you about prices is that, you know, the, the pounding that we’ve been hearing for a long time now is that oil companies are not investing in, in producing oil as much as they used to. They’re being disciplined. And, uh, and maybe they’re just talking about the US shale guys, which that seems to be the case, but when you look at non OPEC production, can you, it’s it’s coming on pretty good, don’t you think?
Yeah. It, like around the world, yeah. There, there’s gonna be decent growth this year in, uh, Canada, uh, Guiana, uh, will probably be up like one 50 to 200,000 a a day. Norway, uh, is is has been a remarkable success story for, uh, north Sea production. Us not so, you know, us the production, the, the growth has really been in, uh, non crude liquids. You know, NGLs last year I think was, were up like 500,000 barrels a day. They’re gonna be up a little less this year. Uh, Brazil too is, is bringing some, uh, you know, is bringing some new production to the market. So yeah, non OPEC production is growing nicely. Russia, of course, is a non OPEC producer, so, you know, you, you non opec produ production, you know, would be up, I don’t know, a million and a half to 2 million barrels a day, something like that if it weren’t for the loss of Russian.
Russian. So you, you’re definitely seeing, uh, some growth in, in, uh, non opec, uh, not OPEC production, but the ones that are really in, and, and there’s investment going. I mean, BP just made a big announcement on, on, uh, you know, their, their capital expenditures, you know, they’re going to spend more on, uh, fossil fuel development than they had planned. Right. Uh, but, you know, op, the Persian golf producers are still, you know, they’re, they’re, they’re still investing very heavily. And then, you know what they know even as non OPEC production grows, it is true the last few years, the, the, um, the investments, the capital investments by non OPEC producers, you know, are, are, are not particularly in the us you know, it’s probably not sufficient to, um, maintain the growth we’re gonna need, at least for the next, I don’t know, the next five to 10 years. So OPEC’s gonna be in a, in a very good place.
So that, that, um, story we’ve been hearing for years now that we’re not maybe a few years now, but, um, that we’re not investing enough is still out, is still valid out there.
I think it’s still, yeah, I think we could probably invest more, you know, you’re, you’re kind of caught in the transition here, right? You know, for some of these, uh, for the, for the majors and you know, the independent producers. So it’s good, you know, the next Yeah. You’re caught in the transition.
Yep. Prices you had, you had some good calls the last few months about trading range markets. Let’s talk about, uh, crude oil. First of all, what do you think going forward? Say a month out?
What are we doing? I think, you know, I I think still a range, but as we’ve been talking through this call, you know, the, the the down the, I guess there’s some threat, you know, you, you’d think beforehand there’s no threat for the downside. You know, I, I think there’s a threat 70, you know, we’ve been in this 75, 85 or 72 82 type range for a while and longer 70, 90, could it break 70? Yeah, I guess, uh, I guess there’s a chance. I mean, I like the range a little better because inventories global inventory still are on the low side mm-hmm. <affirmative>. Um, and we are still looking ahead at second half being more of a draw than a, you know, we’re looking for draws in the, in the second half. So I sort of think it’s gonna hold and, you know, still be in this range. And, and you know, and, and, and I think we’re, we’re stuck here, but I think that it’s interesting, Jim, that you’ve brought out, you know, how, how the downside could be, you know, could be at risk.
Okay. Uh, Andy, anything else, um, you wanna talk about before we, uh, shut down here,
For, for another month?
No, I think we covered a lot, Jim.
We did, we did. I guess I’m gonna ask you if you had a, um, option play, what would it be?
Well, I’m in the cocoa market, Andy, so, um, <laugh>,
Uh, no, w t i
Well that’s a good question. I, the, you know, you kind of, when you, when you talk about a trading range market, you, you’re thinking about selling straddle strangles, you think about selling options and that’s actually not been a bad play because the, the, um, implied volatility has been at a, like about a 10 point premium over what we measure as historical volatility. There’s not perfect measures with each other. One’s looking backwards, one’s looking forwards. The other, um, one of ’em is based on settlement prices, so it doesn’t pick up all the volatility, but the historic, so basically the trading ranges have gotten narrow, basically not to support the implied volatility out there. So, so, uh, for the last, I’d say couple months, the options sellers have had the advantage, but, you know, the, the big question is there’s, there’s a lot out there that we, you know, we have this war going on in, in Ukraine, you can’t forget about that.
So you, you know, you have to be careful when you’re selling options in this market. So I like to look for markets that are, um, have the volatility squeezed out of them, and it’s, it’s hard. They’re not always there and, and to play a direction. So, so, so basically the, if I’m looking at April, the implied volatility is a 36% and that’s come down from around 50 to fifties in, in, um, last October. So, so the volatility’s getting squeezed, um, it’s probably not such a bad, it, it still has a premium over the historical, that’s probably not such, such a bad time to look at buying some, uh, you know, outta the money puts or something like that. Um, if, if I had to do something accrued right now, that’s what I would look at.
Certainly not the popular trade.
No, no, that’s right. And you know, the, as as we, as you know, very well analyzing markets and trying to figure out where they’re going is different from trading markets, right? You’re, you’re looking for, you know, what’s in the market, what’s not in market. And, and I think what my point today was, what I don’t think is in the market is the possibility of this going south. And, and I I would, I would think it would be sooner than later. So it’s probably, you know, over the next couple of months, not maybe in the back month. So yeah, it’s, it’s a different game when you’re trying to put in, put on positions than just trying to figure out where the market’s going. Right?
Yeah. It’s like picking the Super Bowl. You, you had, you had to, uh, who, who was, who ended up being favored at the end, I think it was, um, I think it was the Eagles. So that, so that was a good, that was a, you know, that was a reason reasonable line. I mean, going into the game, I thought, you know, I didn’t know who, I didn’t have a good idea who’s gonna win, and the line was like a, a point and a half and it flipped from the beginning to the end from one team to the other. So yeah, so, so I think this market, going back to where we are, does have, like, when I’m looking at options, I, I think it has a, uh, a significant bullish, uh, bias into it. Um, so yeah, try to, try to play it the other way.
So, anything else, Andy?
Right? No, my, just, if you wanted to get a hold of me, I’m at firstname.lastname@example.org.
Check out our website as well.
Yep. And I am on, you can get me a commodity research group as well, but I’m also on LinkedIn and I, uh, occasionally put up things that I’m interested in, not always oil markets, but, um, I’ve got a bunch of people, mostly my friends on there as well. But I say yes to anybody that wants to connect with me on LinkedIn and Andy, I’ll talk to you next month.
Okay, thanks Jim.