Commodity Research Group (CRG) is an independent research consultancy specializing in base and precious metals, as well energy products. The Group provides research and general price analysis for these markets, along with advice to companies seeking to construct hedging strategies.
In this podcast, Andrew Lebow and Jim Colburn discuss the latest economic trends and supply and demand factors affecting oil prices.
About the Experts
Andrew Lebow
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.
Transcription
Speaker 1: (00:01)
Good morning. 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 along with Ed Meir. Andy and I founded commodity research group, which consults on various aspects of commodity markets. Check out our website, commodity research group.com where we post our monthly commodity reports, our daily metals reports, our blog and our podcasts. We would also like to thank our good friend Doug Stetzer of EKT interactive oil and gas training for hosting this podcast. You can check out his daily newsletter, podcast and learning modules@ektinteractive.com and for a disclaimer. This podcast should be construed as market commentary, merely observing economic, political, and market conditions. And it’s not intended to refer to any particular trading system. We are not responsible for any trading decisions taken by anyone, not intended to listen. Information is not guaranteed to be accurate and we do try. This is not an offer to buy ourself any derivative. Today is June 20th. Andy Lebow the market is a falling out of bed right now. What’s going on?
Speaker 2: (01:32)
Well, the, uh, just looking at this chart today, chairman’s, is this one word to describe this? A front month? Uh, crude chart I’m looking at July is expiring today, but, uh, the chart looks absolutely horrendous. Uh, were down over a dollar 30 and we’re making a new low for the year. I think it’s seven month lows. And, uh, the technical picture has a completely eroded, uh, since the OPEC meeting in, uh, you know, in, in late May. We, we’ve just gone, we’ve gone straight down. And, uh, I said, I think there are a number of reasons for a w what’s happened to the WTI and for that to the brand market. Uh, one, the news of the last two or three weeks despite opex rolling over the deal has been a uniformly bad. Uh, let’s start one with the, um, inventory situation. I think of it in the last two weeks according to the EIA and there’s another report of course out out tomorrow, inventories rose by 22 million barrels, total inventories.
Speaker 2: (02:44)
And, uh, you know, the market is looking for, for draws now and the 22 million barrel increased certainly was completely demoralizing, uh, to, to Wti market and to uh, and to the bowls and think they are beginning to, uh, slowly but surely throw in the towel here. Um, and I think it’s also gotten the, uh, bears who may not be in this market. We may be seeing some new shorts into the, into the market. Um, as we, as we come down, uh, the IEA, I thought I’ll put out a, I’m lukewarm report, um, during the, during the last, uh, last couple of weeks indicating not some bearishness for 2018 and uh, we’ll talk about that. US production continues to grow, uh, and we’ll talk about that as well. But, uh, we’re seeing, um, US production, um, just continuing to grow not so much in June, but looking forward over the next couple of months. Uh, US production is set to rise. Uh, I think an article today about drilled but uncompleted wells, uh, really got the markets, markets attention. So it’s really been, um, one bad news item on top of another. And the market has reacted.
Speaker 1: (04:14)
It was amazing to see us come out of that a OPEC meeting and just sell off the market. It was kind of expected a rollover got the rollover and yet still came out of that with a weakness. And maybe that was a, an early a tell of this market. But a quick comment on the IEA, um, 2018, uh, they have non OPEC production up 1.5 million is that’s correct. If you agree with that kind of that’s, that’s a big number.
Speaker 2: (04:48)
I think that’s right. I think that’s a pretty aggressive uh, uh, one and a half million. But uh, you know, they’re looking for, I think it was another six or 700 out of the uh, us, uh, that may be more than that. Canada is set to grow uh, next year as well and they’re looking for growth from a, from Brazil. Um, you know, the problem there is if it’s true, then any growth in demand for next year, let’s say demand grows one and a half, which would be a growth over look over this year, that means non OPEC would take up all the increase in demand. And the big problem is how is OPEC, which has just cut back by a 1.2 million barrels a day. Uh, you know, how are they going to get back in? How are they going to get out of the deal? You know, how are they going to roll out of the, out of the deal? So I think that this, this definitely pressure, um, from the back of the curve and, uh, people trying to look at trader’s trying to look at, uh, what is 2018 looking like? And right now I’m at least the, from the IEA perspectives, uh, 2018 is, is, uh, is looking very challenging for OPEC.
Speaker 1: (06:04)
Right? So I guess from a, from a trader’s standpoint, we, we, we were expecting to see this decline in stocks over the next quarter to three QT, Q two and Q three. And, um, we thought maybe that would be, um, as we saw that unfold, that would be supportive to the market. Uh, but then you have this, uh, you know, to me a massive amount of supply coming online next, next year. Uh, I guess it’s, it’s hard to, to buy at short term when you, when you see that looming in the background.
Speaker 2: (06:40)
And you know, it’s interesting Jim, the market is showing that in the, in the curve because he look at a d seven d say, which was backward dated in May. It’s now I’m $2 contango so, and looking like it could even go, it could even go wider. So, uh, the curve, which we thought we might see go backward data, at least at least the back is looking, is looking really weak. The front’s aren’t so bad. Both the brand and the u s the curve in the front at least as you know, 20, 30 cents. So that, that, that’s sort of holding in. But the market’s telling us what, what it thinks about a calendar, a calendar 18, uh, with the, with these big contango is, and I think that’s a reflection of a expectation of, of growing non OPEC production. And, uh, again, what, what happens when, when OPEC, uh, ends it steel or you know, we don’t know, uh, you know, we don’t know if there’s going to be a rollover or not or whether or not they’re going to, maybe they need to cook.
Speaker 2: (07:48)
The market’s telling them and probably did tell them, uh, right after the, the OPEC meeting that it, that it needed to do more as, as you mentioned, Jim, that was a pretty good tell. But what, what was kind of strange, and we’ve seen this for other OPEC meetings, usually the market tells OPEC what it thinks before the meeting and you know, the market usually if, if it thinks it needs more of a, a cutback, you know, it might sell off before the meeting, this market rallied, going to the OPEC meeting. So I’m sure that, you know, the cartel thought, okay, you know, the Martin, the markets with us.
Speaker 1: (08:24)
So Andy, let’s stay with OPEC for just a moment here. Um, the risks that they face. One you talked about was there the US response or, or uh, you know, the, the non OPEC producer response. Um, but what about noncompliance within their own group? I’m going to go into March eight, 2018. That’s a long time to ask OPEC, uh, to comply.
Speaker 2: (08:49)
Right. And, uh, uh, you know, we certainly don’t, I think it would be very damaging. They, if they start pointing fingers, um, and start increasing production. And certainly there’s a political rifts within OPEC with, with a guitar and the, and the, and the Saudis. Although this guitar is a minor, minor producer, the Saudis looks like they’re going to cut back production further over the, over the summer, um, which they would do anyway because of, uh, the direct crude burn or cutback exports. So that may be helpful for the market. You know, the other thing that’s hurting OPEC is that they’re higher production out of both Libya and Nigeria who aren’t bound by the deal. Uh, Nigerian production looks set to grow by two or 300,000 a day. Um, since they lasted since the last OPEC meeting. And Olivia’s production is said to be up at eight 50. Olivia says that it wants to get up to one, one or one two by the end of the year. I’m not sure they have the capability to do that. And of course, both those producers are unreliable to say the least. But nevertheless, the, uh, increase in, uh, production from, from both Nigeria and Libya, a is weighing on price. And of course those are both sweet crude producers. Um, which means that the surpluses, uh, world on world markets is squarely in on, on sweet crude side, which of course are the two contracts that we trade. Brent and WTI.
Speaker 1: (10:26)
Yeah. That we, I saw the, uh, the u s actually a exported I think, I think this year we had four weeks where we export it over a million barrels a day. Does that sound right?
Speaker 2: (10:39)
I think for single four different weeks for different weeks. Yeah. Yeah, yeah. That sounds right.
Speaker 1: (10:46)
And then, um, we don’t talk about Venezuela. You know, are they imploding? Are they maintaining as a slow decline? What’s, what’s, what do you see for their outlook, uh, as it, as it feeds into this, uh, OPEC, a production number?
Speaker 2: (11:03)
Well, I think the, um, are they imploding while they’ve been imploding for years whenever, but they have been able to, I’m still produce [inaudible] and still export there at around 2.0 million barrels a day of a, of production. I think next year this sets of fall, um, maybe another hundred thousand, so, so it’s, it’s a slow decline. Um, and obviously the market will, we’ll keep an eye on, uh, on the political situation and, uh, in Venezuela somehow Maduro has been able to, uh, to maintain power there. Uh, but that could slip into, into chaos it at any moment. But yeah, you’re right. Jim fennede soya has not really been a all that much in the, in the, um, least on the crude side and the headlines of plate.
Speaker 1: (11:57)
And, um, one other risk too to OPEC cohesion is demand. Um, the Eia seems to be the most bullish on demand. They’ve got 1.5 million this year up 1.6 next year. I think the other two, the OPEC in the, uh, in the IEA might be a little lower. Um, but 2018 would be a hundred million barrels a year. Uh, what, what numbers do you, are you, are you using?
Speaker 2: (12:27)
I think the, the 17 numbers, I think 1.3 is probably right for growth over the next year. May Have Maybe one point, maybe one point for a lot. Some will depend on the u s gasoline market the summer, which were, I’m sure we’re going to talk about cause guessing was yelled at yet another really bad news, uh, item over the last, uh, over the last couple of weeks. Um, India seems to be, um, gaining some momentum on demand. They had some real problems on the demonetization issues, uh, so that they seem to be gaining some momentum. Uh, and China is probably going to be steady, may, maybe a touch lower, but, uh, I think they’ll still come in at a growth of 0.35 to 0.4 a and the global economies. Um, you know, we looked to be in okay shape. Um, you know, I think the World Bank, uh, just just raised, it’s a estimates for a global GDP growth. So I think global economy looks, looks okay.
Speaker 1: (13:39)
Yeah. So all those, uh, upgrades in their estimates, I think they’re, some of them are like three, three, three and a half percent growth, which is, which is pretty good. Um, so what’s Saudi policy to do? Andy? They, they want a high price for their budget and for their IPO coming up. Uh, but when they do that, they’re, they’re a market share is a seriously in jeopardy. So they need to keep a low price to keep the competition at bay. And then also there’s this other part of clean tech coming on strong. Its small part, but uh, it is, it is growing rapidly. Um, they’re, they’re, they’re a market share and the overall energy space, uh, is, is at risk as well. So, you know, what do you tell them, what do you tell them they need to do or what or where do you see Saudi policy?
Speaker 2: (14:36)
I think they’re going to keep trying to follow the follow the path that they’re on. And it hasn’t worked so far, but I, I’ll Philly, uh, has said that he’s not watching the, the daily ups and downs, but, uh, I’m sure that this down, you know, then over the last week or two maybe a something that, that they, that they are watching, he seems pretty certain that the market is gone, is going to rebalance later in the year. And I, it, it should, uh, begin to rebalance. Uh, it’s just taking longer. It’s just taking so long and the market grew more and more impatient, uh, w with the rebalance efforts. Uh, but I think Saudi just for now is going to stay the course. They’ll probably reduce exports that this summer and, uh, have faith in, uh, in the, in their numbers. Um, you know, longer term. They’re clearly, uh, know that they need to diversify away from oil.
Speaker 2: (15:38)
And I think that’s a, that’s a big part of their plan. Um, uh, that was, um, the of their longer term plan that Prince bin Salman has that has been working on a, and diversify into natural gas and probably into, into renewables as well. But I think they also believe that later, uh, this decade and in 2019, 20, 20, uh, the market is going to be short because of, uh, at least short on, on the, on crude. Um, and I mean this is going to be a deficit, uh, based on the lack of capital expenditures, a, the low capital expenditure, the declining capital expenditures from, uh, 2014, 15 and 16. So, um, you know, I think they look on, they look out a few more years and they probably see that, uh, they, they’re going to have a market that is, it’s going to be better than where it is right now.
Speaker 1: (16:43)
I think that’s a good point because we are a, we’re hearing so much barish uh, news, I mean it, it seems to that the lower the price movement seems to bring out the story. So if we’re, if we start selling off, then I’ll call you hear and read about are or the, the bearish, uh, uh, stories and, and um, I think there’s this argument that, uh, the, the capital spending on, on new projects is way down and I, and a couple of years out, um, we might actually have a little, we might be short, a little bit of a crude. Um, and, and that would be the commodity cycle that we’ve seen time and time again.
Speaker 2: (17:28)
It a lot actually, you know, we’ll see that that’s, that’s further out right now. They have to get through the next, the next nine months.
Speaker 1: (17:39)
Right. Um, let’s move over to a gasoline for a second. And the, um, I was just looking, uh, at the EIA reports and, and they show a from April 28th to May 26, uh, we s not five year average. We see a decline of 1.7 million barrels and pad one B in this year. It was only a decline of 0.3. So kind of comment on that and talk about gasoline and what’s going on there.
Speaker 2: (18:14)
Please do. Well, gasoline, what, what a disappointment at least for the last, uh, the last two weeks a on demand, which was so much way off. Trent then we’re, we were looking for gasoline demand to be really strong the summer and um, at least for these two weeks it hasn’t. And stocks built for two weeks in a row. Uh, last week, just a dagger, uh, with that, with that gasoline belt. Now having said that, I still think that this, uh, driving season could be, could be really robust. Uh, pump prices are probably going to end up being below last year. Right now the all, all grades average is around two 50 and that includes the California, um, high numbers for regular gasoline is probably now I like to the national average, it’s probably in the two 30 switch, which is pretty good. Um, highway miles driven this summer should, should the way up over last year, uh, or at least the up over last year.
Speaker 2: (19:19)
Uh, and, and with lower pump prices and people planning to take driving vacations, I, I think we’re going to see a pretty good driving season. Um, the, these last two weeks are kind of puzzling. It could be a, as some people have speculated what’s happening is the wholesalers, um, keeping or not moving, I’m not moving products out out as, as quickly, uh, waiting for prices to turn and, and move up. And that, and that could be an issue on the, on the two, you know, in these two weeks. But I think go forward, we’ll see a pretty big, uh, I think we’ll see some nice figures. The problem is, as we mentioned in our last, uh, in our last podcast is that runs a sell high, you know, it’s still 17 to 73. Those are, those are numbers we did not forecast at the beginning of the year, which means gasoline production is still going to be, uh, on the higher end.
Speaker 2: (20:18)
And, uh, it could, we may not see the types of draws that we really need to get guests in, lean into it into a big time full market, uh, and less refiners start, uh, moving already moving out for a gasoline into diesel. But it’s way too early for that. They’re still, they’re still running for a gasoline and we’ll continue to do so. So gasoline is in a, is it a very, very precarious situation here? Uh, we’re going to need high demand and I think, look at it in the, in the U s we’re going to need high exports. We may get it. Uh, Mexico just had a big refinery problem. Uh, so we may still get the high exports, but production may really keep gasoline from, um, really drawing what, what we need and that, that will be a, that could be tough.
Speaker 1: (21:13)
And what about a distillate seems to be in a little better shape. The uh, the five year average in the same period. April 28th to May 26, uh, we typically see a, a, a build and we actually saw a draw. And, um, why don’t you talk about this? It
Speaker 2: (21:35)
diesel? Yeah, just thoughts. I think our is in better shape. Uh, the, we saw the crack th the uh, diesel crack really fall apart. Uh, and the gasoline crack both also fell apart over the last few weeks. They both have sense rally pretty nicely. Um, diesel demand. Again, if the economy is, uh, as strong as what we’re relatively strong out enough, three, three, four, is that a hall that strong, but nevertheless diesel is, is the, um, product that you, that uh, should benefit the most from a, from a stronger economy. Diesel exports have just been rip roaring and I think that that’s going to continue to, uh, I think we’re going to continue to see that. So to me these ill looks like it said in much better shape. Uh, the, the last given the last, uh, EIA report, um, we’re still, we’re around last year’s levels were still around 20, over the four year average. So that’s not great. But I think that there’s some hope for diesel.
Speaker 1: (22:47)
So do you want to say, uh, tell me what you always say when we, somebody wants to lean in and buy this bullshit. So gasoline,
Speaker 2: (22:56)
this probably a million other trades that you should be doing that other than the heat to gas trade, which is affectionately known as the, uh, as the widow maker. That was the original widow mag. It wasn’t originally, it was the original wood maker. I think that the heat to gas traits is one that, uh, that Eddie speculators should avoid at all costs.
Speaker 1: (23:24)
I think the march, it was a march, April natural gas as the other one. Um,
Speaker 2: (23:30)
let’s, although I love taking that, uh, because even though diesel may look like better shape, you know, you could have a big hurricane come through, come in and uh, uh, the next to get all the refinery capacities out. You could ever finery issues there. You are long, long heat short guests, you’re dead, you’re just dead. So it’s not a trade that I think either one of us would really recommend.
Speaker 1: (23:59)
Right. And that’s a, you bring up hurricanes I think we used to look at hurricanes is taking out oil production and then we realize they also take out a refinery. So you take out supply and you take it out demand. And then with the natural gas used to be a very, very bullish, uh, for natural gas. But now a lot of natural gas is being produced a everywhere, particularly in Marcella’s. So you know, the, the trades evolve as we move on. Um, let’s move to prices, price, outlook. I mean we talked about prices, but, um, we were looking at I think the 45, 55 range and a and previous podcasts, I tried to squeeze a bullish a number out of the UN and saying, can we get to 60 by the end of the year and grudgingly says, yeah, you could get to 60. And now we’re, we’ve, uh, have broken to the downside of this range. Um, going forward, is it, I mean, is that still, are those still good numbers or you know, do you, would, you obviously were outside the down, the 45 has been violated, but what do you, what do you think going forward,
Speaker 2: (25:10)
what happens when the technicals look bad? All the news is bad. Everyone’s trying to get short the market, uh, rallies. So I’m not saying this is the bottom, but it’s certainly is getting, it certainly wouldn’t surprise me to see that, to see the market rally rally outta here. It’s certainly, it needs to, it needs to stabilize. And I think that the thing that it needs is at least we’ve got to start seeing on the EIA numbers. We have to start seeing stocks be good to at least draw, not bill 22 million maybe even on change would help. But we have to sit and start seeing some evidence that, that we’re, we’re going to see a doctor on. I think we will, I, it’s just, it probably is going to be quite as much as a OPEC had had a whole four, but I think that stocks are going to draw for the next, over the next nine months we’ll be, we’re not going to get to the five year average that they want. That’s not going to happen. Uh, the, the five year average of the inventories at the end of March is like 2.8 billion. Um, we’re not getting there. I think we’re going to get to like 2.95 which would still be 100 million draw. That’s something. Um,
Speaker 1: (26:33)
I think one of the ways I’ve been looking at this, and it’s, has it worked out, but his is from a day supply situation. If you don’t have, if you just stay balanced and you get a say a million and a half increase in demand this year, a million and a half next year or something around there, now all of a sudden you’ve got the same inventory supporting higher demand numbers so that it kind of a stealth way titans of the market or, but if you do get some, if you do get some progress in drawing in these demand numbers increasing, you know, it may at least keep the market from a phone apart, the downside and maybe get it back into that 45 55 range.
Speaker 2: (27:17)
Right. And that, that wouldn’t surprise me at all. Could it break 40 a I mean, the technicals look so bad, the, you could see some fall through selling in here. Uh, but we’ve got to, we did, we need a little bit of good news to, to help the market to help the market as well. You know, I forgot, I, I mentioned it, but that, that duck story that was on Bloomberg today, uh, w was also not encouraging saying that drilled but uncompleted wells or, or at a three year high. Um, and that that could still encourage a rat rather than drilling the wells. You might start seeing well completion. So us for deductions still could be still could be on the, uh, on the increase. I think one, one good thing about these low prices is that we’re probably not going to see all that much hedging activity, uh, in the back of the curve by on the way of, uh, by way of a producer’s, uh, so, you know, maybe, maybe that’s something, uh, I think the, the cow 2018 is 44, $4,445.
Speaker 2: (28:27)
Uh, I don’t, I don’t think that’s going to, that’s going to draw all that much hedging activity. So that could be, plus that could be a plus. Um, similarly the, you know, the Bowel Mo for 20, the balance of the year, um, is 43 84, 84. Um, and it looked like, it looks like from some of the, it looks like producers are still under hedged, so, uh, they, they need to get these hedges on and it’s not going to be done at these low prices. So maybe us production won’t grow that much. But again, on the alternative for these drilled but uncompleted wells.
Speaker 1: (29:08)
Interesting. And what are the implications for the, for the, uh, structure? I guess we’ve already seen a move in, in these red, these are the 17 DCA team. You think that’s got more to go? Or
Speaker 2: (29:21)
maybe maybe the, the, again, the chart doesn’t look, the chart doesn’t look particularly good on any of those, uh, on any of those. But I do think crude stocks given that runs are so high. Uh, I do, I do think we’ll get on there 500 million and maybe down the 485, four, nine the on crude stocks. So maybe that over the next couple of, so maybe that will uh, arrest some of these declines in the, um, on the [inaudible] these uh, to get back or they, I don’t see that going back dated right now, but again, it was backward dated just at the end of May. Right.
Speaker 1: (30:00)
Is Change. It does change. Markets fluctuate, prices change. Um, what about, uh, let me put it this way. I have the three gasoline, diesel crude oil. What do you think is the best performer and the least performer? I’m not asking you a absolute price of just asking you relative value we think is going forward is going to look good relative to the other two.
Speaker 2: (30:25)
Yeah, I said I think that crude will probably, since I do think that the crude stocks are going to draw quicker than either either the product stocks, uh, I think crude is going to look, uh, the best. Uh, diesel I think could look, could look okay and gasoline, gasoline as, as we said, it’s at a very precarious state right now. Uh, but if demand, if demand picks up and we can just get a little, a little decline on the output, which could be a refinery issue, uh, margins, unfortunately, having completely collapsed yet. So you know, that that could be, that’s an issue too, but I probably rank gasoline is third, but with a possible bullet on get a bullet to the upside. Excellent.
Speaker 1: (31:11)
Okay, Andy, that’s great. Let’s, uh, let’s wrap it up there. Uh, this is Jim Colburn. Check us out@commodityresearchgroup.com.
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