Podcast: June 2020 Oil Market Analysis

Well, I think the real question Jim is, is what didn’t happen. Uh, it’s been a remarkable, it’s remarkable couple of months in the oil markets. And, you know, I guess the only thing we’re missing really is a big geopolitical upset, but you know what, Jim, you still have six months to go in 2022 it’s, uh, maybe proving in the most eventful year we’ve had maybe since, I don’t know, 1968, something, something like that. But in any event in the, um, you know, certainly when we did our last podcast, the market was, as, as you mentioned, was in disarray, we were still in the midst of, of a price war worried about, um, we’re still worried about COVID. And, uh, we were, uh, at that time in the, in the middle of what IEA executive director Bureau has called black April, and, you know, the market reflect in the markets reflected that we a big contango.

Uh, we went, we went negative. Frank went to multi multi year low. So what happened since then, and certainly on the, on the supply side, OPEC and OPEC plus did, did get their act together. The Saudis and the Russians did get their act together. And not only did they get their act together, but, uh, that they’ve cut production, that their number was nine, seven, and they probably close to eight, seven, eight, eight, maybe even 9 million barrels a day of cut, which, uh, the market was, um, actually pretty cynical that, that they’d be able to get, you know, get those numbers to a, anywhere close to the nine seven. And then we had big production cuts from, uh, non-OPEC producers, the U S and Canada leading the way. So, um, as, as a result on the supply side, massive cuts in may and into, uh, and into June, and certainly on the demand side as the lockdown ended globally, or, um, you moving into phase one phase, two red, yellow, green window, whatever you want to use, obviously demand improved.

And as a result, the massive stock builds have a bade. Uh, and, and the market rallied into that. I think that what’s surprising, at least to me was, and I’m sure to many other analysts and traders who may, you know, may now say, Oh yeah, yeah. I saw that. I think what was surprising was the rapidity of the rally gym. You know, I think many of us were probably bullish for third or fourth quarter, you know, I know I was thinking, okay, maybe this maybe WTI can get it to the 40 sometime in the fourth quarter. And here we are one month later or weeks later, and we’re up to a $40.

I know, I know we’re going to get into the EIS, uh, short term energy outlook that came out yesterday. But one of their comments in that report was that, um, they, they, uh, expect June inventories to draw by 1.9 million a day and a month ago, they had June as building 1.6 million barrels a day. So they, they kind of thought the draws would come in, in, uh, starting in July. And, uh, now they’re pushing it up to June. So I think it caught a lot of people by surprise. And, you know, one of the things we picked up on our blog was that the, um, the spread option guys were liquidating puts. So you could see large volumes of trays going through an open interest going down on the puts. And then you saw some, um, call this, this would be buying it there. There was actually a, I think, I can’t remember where plus 25 call strips going. So people were actually not only saying, you know, the, the, uh, the worst is over, but they’re saying there’s a chance we go backward dated in June, July. And, and I guess, uh, we did for a little while. Right, right. Yeah. It’s snuck into a backwardation, um, which is a whole, a whole nother story too, to itself. You know, the other thing that we saw was just a tremendous amount of speculative buying. You know, you look at the commitment of traders and, uh, the, the net length has just exploded in the last eight weeks. It’s up over a 200,000, 200,000 lots of, uh, new, new net length on the, on the money Mack on the money managers side. So, you know, the, this, you know, the specs were, I guess, suspects are catching it. Maybe not so much all the, you know, all the wall street analysts, we’ve built 240,000 of net length in the last eight weeks, uh, as a parent, as, um, you know, according to the commitment of traders. So, um, you know, they they’ve been on board for the, for this rally.

Yeah, it’s interesting. We did have a couple of our oil guy, friends that were, you know, their barrel counters and they picked up on the rapidity of the cutback in the Cushing Cushing area in the, in the, uh, the, uh, all the, all the areas of the U S production declining. Like they were getting, maybe it was anecdotal, but they’re, they’re catching that, you know, this stuff, uh, production is declining faster than anyone thought. And, um, you know, part of that, wasn’t, wasn’t by choice. They just had nowhere to put it, you know, right in OPAC today, they, they, they look like they’re doing a great job, uh, cutting back, but they, there was no demand out there to put barrels. So it was probably one of their easier calls to, to, uh, cut back more. And, um, you know, the getting back to that EIA report, they have inventories drawing two and a half million per day from June to the end of 2021. And we’re going to, we’re going to get into the difficulty of, of forecasting these numbers in this kind of environment, but that’s kind of a, that’s kind of a bullish look to me. I mean, that’s, you know, that, to me says that we, yes, we, this, some of this is built into the market, but there’s a lot more to go with. Should that unfold the way they think it might?

Yeah. I, I, I think they’re, you know, they’re, they’re saying two and a half million barrels a day from now until the end of 2021, which is, yeah, I haven’t thought about that. Uh, you know, it’s sorta like just pick a number, but our own numbers, you know, we’re, I, I think June is going to be like balanced to a slight draw. And then I think third quarter, you know, we’re, we’re probably going to see close to 2 million barrels a day draw, but I think, but you’re dealing with, uh, some, you know, on both sides, uh, both the supply and the demand side, it’s really difficult to, you know, the supply, which is usually a little bit easier. You know, we’ve got a lot of moving parts on, on OPEC side. We know that, um, Kuwait, UAE and Saudi are going to increase production in July, Libya.

I don’t know. Um, and, uh, Iraq, Nigeria, uh, they’re, they’re promising that they’re going to cut back. Iraq was given a, almost a re a very tough task, and I doubt they’ll ever comply a hundred percent. Um, cause there are a hundred there for five to 600,000 barrels a day, uh, away from that, uh, Russia is going to increase production, you know, from the non-OPEC side, Russia is going to increase production, no doubt, uh, in, in, um, you know, beginning in August and, um, you know, so, so those numbers are gonna be difficult forecast. The U S numbers are proving to be very difficult to forecast, you know, as far as the, uh, you know, Canada’s, Canada is probably gonna, it’s definitely gonna increase, uh, production. I think they’re already on, on the way to increasing production.

Yeah. They’re all, uh, these are moving targets and lots of moving parts, and it’s very, very hard to, uh, you know, get up. You, you use a big standard deviation around that, uh, any number that you put out and, um, you know, it’s just something, some a number to work off of. It’s almost like, uh, what some of these guys call scenarios, here’s the, here’s the scenario we’re working with and we don’t, we know it’s not going to be right, but we have to work with something.

Right. That’s what the AIA did with the two and a half million. I know, that’s what I’m, you know, I’m doing with this, with my balances, you know, they go, they change all the time.

Yeah. So I, you know, I was looking at the EIA numbers, um, yesterday and, um, they, they have a piece they call, uh, like the notable forecast changes from the previous month. And, um, they use, uh, GDP estimates from, um, IHS market. And so for the U S they were looking at for the year, uh, a decline of 7.4% in GDP. And that was a minus two from the may forecast. So that’s, so they’re looking so that GDP forecast went, went down and I’m pretty sure it doesn’t include, you know, Friday’s, non-farm payroll and, you know, last week’s unemployment data, which if you look at just the, sort of the mathematical models, no judgment calls that they fed the Atlanta fed and New York fed use, um, that would be, they increased their estimates for Q2 by five to 10 GDP point full points, you know, so, so already the numbers they’re using could be, you know, if you gave them, if they use an updated GDP forecast, maybe they’re even more bullish than, you know, maybe it made me more of a draw would be their numbers, but anyway, it again is what you said.

It’s a very, very difficult, these are.

Right. Right. And I was just, you know, I was talking about the supply side, you know, the demand side, talk about, you know, trying to come up with, uh, with, you know, what you can only come out with think, you know, use your best estimate, best estimates. Uh, like you said, you know, you’re looking at five to 10 GDP points, you know, that’s huge. So that’s half that’s, let’s see that’s a, you know, a million, a million and a half barrels a day, maybe more, you know, I’m not on a swing. So, um, you know, I think you could, I think you could look at some of them what the markets are telling you. And, um, certainly, you know, demand this improved dramatically from, from April that’s obvious. Uh, but you know, you know, margins are really not that good. And, uh, in fact they’re pretty poor, uh, because this rally and crude has, has been, so Swift products have not have not kept up with it by, by any means, you know, that we’ve, we’re seeing, um, you know, the margins are getting a little bit better in the last week or maybe in the last week, but, uh, there’s still well below, uh, where they were for like a year average or even over the last, uh, 15 day, 15 day average.

They’re poor.

Yeah. I was going to ask you where you want to go next, but having brought up margins, um, can you talk about specifically, what’s been going on with distillate. I mean, it looks like we’re building stocks that this was the one that was going to perform well, and it looks like we’re making, making a lot, no ironic.

I mean, we were talking about, we were talking about IMO 2020, you know, that was going to be the big event of, uh, 2020 for a diesel, you know, Mo 2020. And it’s, you know, now you barely even, you know, that barely even scratches the surface, but this lets stocks have built globally, uh, refined. And that’s a function of, uh, of the poor demand for jet fuel. And, uh, they’re on jet fuel. We came really close and running into contain your problems in April, you know, at the airports where, when people just stop flying and, uh, refiners had to, you know, go to plan B, which was, uh, try to blend their jet into, you know, into diesel and to distill its, uh, and produce more distillate and less jet and, um, demand for, for diesel has been pretty poor. It was good in March, terrible in April, reproving in may, it’s getting a little bit better, but we’re built, we’ve built like right now, total us, this led stocks are 176 million barrels, which is a, you have to go back into like the, you know, the 1980s and the late seventies to get numbers that big.

Wow. Uh, yeah. And you know, they supply, which is stocks over, um, demand is 54 days. The four year average is 33 days. So we are like way over supply with, uh, with this lit. Now, you know, that that’s regional because I just, uh, Chicago, uh, ULSD D I think it went backwardated today. So there’s like diesel everywhere. You know, what a water, every everywhere. And we love to drink, you know, the West is a little bit tight on diesel, but Europe is, is long diesel. Uh, Asia is a little bit long diesel, so that’s, that’s a big problem. You know, that that’s a big problem cause we can’t keep making, you know, diesel yields of beginning to come down. But, you know, refiners have to be real, real careful on, um, you know, on diesel. So, you know, that that’s, that, uh, has led to, you know, that that’s been a big drag on margins. Um, gasoline is, um, inventories right now are 259 million and that’s um, the four year average is two 36 days, supplier 35. Uh, the four year average is 25. So that’s 10 days supply to high, but gasoline demands for getting to come back. Um, you know, it’s not going to be where it was in 2019 for, for a long time. I think Jim, yeah.

As I see the EIA says we’re going to grow demand in 2021, but it’s still going to be, I think, a million barrels under 2019 that’s that would be world, you know, total, total demand. So yeah, we’re not, we’re going to come back, but not to what, where we were.

Right, right. Hey, we may never come back to, uh, where we were in the U S on, uh, at, at twin. I don’t want to say never, but it may, you know, that may be a high watermark for, uh, you know, for a while. Um, certainly I think you look at the unemployment numbers, even though they were better in Bay, this is still, you know, tens of millions of people that are unemployed and won’t be dry, you know, unfortunately won’t be driving to their jobs, whether Americans take at least the U S whether they take big road this year, you know, that’s another question, you know, when what’s the, what’s the road shorts that some are gonna look like,yeah. I, I hear that anecdotally, that people will not be flying, there’ll be driving to places. And now that many have been able to work away from their office, they might set up a office in a Airbnb someplace. So I would expect that kind of demand, but then, you know, like you always say, there’s not enough people working that still drive, but we live in New York area and there’s a lot of mass transit to, to, uh, commuters. And so, but let the rest of the country allow most people drive to work.

And again, what are those drives? You know, what are those Airbnb drives going to look like? You know, you know, is it gonna be just, you know, within five hours or something like that, you know, you’re going to see those big, you know, national park road trips, maybe, maybe, but I think the big problem is on, on the employment side, you know, that, that, you know, that’s going to be an issue on, uh, on gasoline demand.

Yeah. Um, let’s just take a little and move into my world. And the, um, we’ve, we’ve seen, uh, the option market. I always look for stuff to, you know, kind of look at what people are trying to do in the marketplace to confirm what we’re, what we’re reading and, and what we’re talking about in, um, in March we had, if you look at the, the regular WTI, they call them ELO options. Uh, 200, almost 205,000 trades per day in April, 150, 6,000 tray traded per day. And obviously March was a big old OPEC meeting fell apart. April was the, a minus minus prices and the famous, uh, we had a couple of minus strikes, trade, not very many, maybe a handful. Um, we had a zero strike put trade, and I like to say that somebody bought that put for the right to sell something for nothing.

And then in may, we, we dropped down to 87, almost 88,000 contracts. So really a measly trading month of may and the CSL markets that the spread options followed that as well. They’re kind of not maybe the last couple of days they picked up because of the OPEC meeting. Um, but yeah, there’s, there’s, there’s no really, I thought for a while, maybe the direction was people buying puts, but it doesn’t look like that’s a, it doesn’t look like there’s a trend in what, what the people are trying to do. And the volatility of course, was, you know, over 200% as a using a black Shoals, a model which blew up, uh, once again. And, um, now it’s down into the fifties. So, so, uh, it’s still, you know, on the high side, relative to a longterm average, but much, much, much, much lower than what it was during the, uh, the craziness back in, uh, March and April. What do you think is a given what’s happened in the market and given what you have been your numbers and what you’re reading other numbers, what do you say w how much of this is in the market now is the market overbought now is it’s got more to run.

I think it could be a little overbought, but I don’t, I don’t know. It doesn’t look like if we’re looking, if we’re thinking about stock draws, granted, you know, the it’s it’s stock draws from huge over, over supply. I mean, the over supplies probably, you know, it could be as much as a billion barrels relative to where we normally are this time of year. But if we’re, if we’re talking about stock draws into July and August, and maybe into September, the, the EIS is, as you said, they’re talking about it through 2021, but yeah, it seems like, it seems like 20, 21 is, you know, that’s a whole nother chapter, right. Let’s just try to get through 2020, you know, 20, 21 is more about what Fowchee saying than what the EIA is.

Right? Exactly. That’s a long way away, 20, 21, but in any event let’s get through tomorrow. I think, I think the, you know, if we aren’t, if we are, if the balance is, do look like the stock draws, you know, I don’t really see the market really, um, giving way, you know, like it did early, earlier in the year. So, you know, I, I think it’s going to be steady, possibly possibly higher. You know, the problem is you’re, you’re fighting the, this, all this inventory is going to come, it’s going to come out. Um, and the floating storage is gonna, is gonna come out. You know, Brent, we’re seeing that begin to weaken again, structure anyways, what I’m talking on on brand. So, you know, maybe the market has some legs over 40, but could it get to 50? That’s going to be a really hard, you know, I think that’s going to be a really hard task gen of UTI, you know, up to 50, can it get 42 to 45, if everything breaks right on demand continues to, to improve. And, uh, you know, the, these production declines are, um, in the, in the U S you know, continue it. Yeah. I think that that’s not completely out of the, out of the posts out of the realm.

So you’re not, you’re not using a minus 40 plus 40 range.

Well, I would like to use minus four plus 40 bucks. I don’t think that’s, I don’t think that’s realistic. And we haven’t, you know, we haven’t really spoken about us production or that, or the, you know, these crazy weekly reports.

Well, let’s, let’s talk about the weekly that just came out this morning, because I thought what was interesting was the demand side, total product supplied, uh, is up two and a half million. And there’s there’s problem. I mean, there’s problem with estimates, but there’s problems with these numbers as well.

Yeah. You know, a lot, the one thing about these weeklies and, you know, we usually have said over the, during the course of these podcasts, you know, you really have to look at four week averages and you have to understand that a lot of these, you know, there are models. And the one number that really people focus on weekend that we got that’s a model is the crew production. Crude production has come off 13 from 13 one on a weekly basis to 11 one. So it’s 2 billion barrels a day. We think, you know, we don’t find out really until the EIA has done a look back when the petroleum supply monthly comes out two months later. So we won’t know for sure. And that’s, you know, that’s clearly a big problem. The other big problem is that they’ve got this number, you know, the adjustment factor or the, you know, the fudge factor, it’s running like a million barrels a day for four week average, they actually call it the adjustment factor, the adjusted factor, write down a million barrels a day on a four that’s, 28 million barrels. What does that, you know, is that what I know what it is? It’s, you know, it’s where, when things don’t balance, they do what they call an adjustment. And, you know, if it’s off production, that’s really bullish. That means that production is a lot lower than what they’re reporting. Uh, if it’s off exports probably less so or imports less. So that’s a, you know, that’s a big number.

So that number you’re saying the four week average is a million. Typically we’ve seen it a million in the past, but not, not sustained, is that yeah, not sustained. I mean, you know, we’ve seen it like 700,000 barrels a day. Yeah. I mean, even on the, um, you know, when you go back to the petroleum supply monthly, there is an adjustment, there is an adjustment number. Um, typically they’ll, you know, the adjusted factors adjusted lower from, it’s not that as outrageous as what it is, what it appears.

Right. What, what, um, what numbers are, you know, I want to say, can you count on, but well, the stock numbers, you can, you know, those you can count on the imports are, um, they’ve done a little bit better job on, uh, on important numbers, you know, apparent disappearances just that’s a formula. So you don’t, that’s not real. And what am I missing? I mean, the, you know, the stock number, as I said, the stock numbers are probably pretty good.

Yeah. There was a, it was actually a draw and Cushing this week to two, 2.3 million barrels of 49 four, which is a below last year’s number.

And yeah, I mean, Cushing actually the, the four week it’s 49 four, and it’s the four year average is 55. So we’re, we’re below, you know, for all the hand wringing, including mine about, you know, Cushing reaching tank tops, you know, where we’re below normal.

It’s unbelievable. Cause we, you know, runs her way down year to year and, and it’s it’s supply, right. I mean, it’s just a production. I mean, yeah. It’s production. The other thing that you know, is pretty important is, is that the, it does the crude stocks don’t include the SPR rental barrels. Right? You got to add like six, 15 million. I think it was 20 or 22 was the total. So actually crude stocks are, are you look at five 38, but because right now this 15 million being stored in SPR and in which the, you know, the people, the company storing it or paying the government, just the rental fee, right. Those barrels will almost certainly come out. Um, the earliest they can come out, I believe is September. So, um, but you know, there’s another, and that’ll, so there’s another 20 million barrels actually the domestic supply, which makes it look even more dire actually.

Right. Yeah. I saw that there was a, like a little more than 2 million barrels put into the SPR and that’s, those are probably rental rental barrels, not they’re all rental barrels. Yeah, yeah. Not at all. I mean the 15 million, so it’s all gonna, you know, it’s all going to come out and the, um, U S oil production, I guess the EIA talks about a six month lag from, uh, the change in price to actual movement in production a little quicker this time. But, um, what they’re looking for a declined to 10.6 million by March of 2021, right? Yeah. 11 one, according to the weekly, which as we said is a modeled lumber. W but we’re already starting to hear sprinkling of stories that, uh, they’re starting to frack again in a, in a, I mean, looking at increasing in the Permian, is it that, you know, that, that, that definitely makes sense whether or not, you know, those, those increases are to be enough to counterbalance the depletion. You know, that that’s another matter it may arrest, you know, certainly the rate of decline is going to be a lot lower than it’s been, you know, if we’re looking at 2 million barrels a day, uh, since March, you know, the rate of decline for the rest of the year should be, we think, you know, less and what the EIA is saying less than, you know, what, what we’ve seen so far, but the rig count, you know, is down to two Oh six from, uh, I think that’s down 600 in the last year, maybe more than, you know, maybe more than that. And certainly we know that you’ve got to, um, you know, you’ve got to drill and produce new Wells, uh, you know, have new Wells produce in order to make up for how quickly some of the legacy Wells decline.

So depletions, depletions a big, uh, big issue, but we do have a pretty big inventory of ducks drilled, but uncompleted Wells, that that will probably come on first, you know, and then I think drilling will pick up, you know, sweet as prices pickup naturally. So what’s the real number going to be Jim that’s, that’s, that’s a big question. I think there are some analysts, you know, who are looking for production to go down to 10, uh, either some 10 point CRO by the, uh, by the first quarter and they could be right. They could be right. Or as we’ve learned in the past, you know, us, one thing we know from, you know, us frackers is that they’re, um, they’re pretty good at what they do way too good at what they do. And, and, you know, there’s certainly, uh, what I would think is we’re going to see consolidation in the industry and, um, you know, there’s definitely going to be more efficient operators, uh, with higher, with, um, a bigger balance sheet taking over some of, some of this acreage and there’ll be able to continue to drive the costs down. So, you know, Mike go down to 10 and, uh, maybe, uh, you know, I think that’s a little low, but we could see, you know, we could see a pretty strong recovery as well.

So Andy, before we wrap this up, are there any, there’s so many eye popping jaw dropping numbers that are coming out, whether you’re following energy or the macro economy, but is there anything that stands out to you and you just said this, Holy, this is unbelievable. Or is it just one after another?

I think it’s like a greatest hits Chimp. It’s just one, you know, it’s just like one out. Yeah. It’s one after the other, you know, I look at any, you know, almost any of these numbers and it’s like, Oh my God, you’re not like, dislet, stock’s at 176 million, are you kidding me? You know, or, or the price, right. The two of us and in April or just, we couldn’t believe it, but it went, you know, that it went negative. You know, I didn’t think it was going to go below nine 75 and it went to minus 40, right? Yeah. Well, that’s that’s right. That was probably one of the biggest, and I keep mentioning for me, it was, uh, you know, the zero struck price, people pay it. I think I’ve traded out the $4. That’s a, wow. It’s the black trolls model has always had problems with it. You know, that’s, if you think about an option market, having a skew where some options that are trading off the same futures, price have different implied volatility, that’s telling you that the model is, you know, it’s not reflecting what’s going on in real life, so it should shouldn’t, that shouldn’t happen. So, um, so, and then when you think about, you know, the, the extreme, like ad exploration, a lot of these, uh, measures blow up like the cameras, stuff like that, but this was a case where the underlying assumption of negative, not no negative prices kind of blew up.

And, um, all the, all the puts just exploded in or, you know, in value out of the money. So that was, that was kind of, uh, interestingly, we, we did, like I said, we did see some minus strikes trade, but there’s only a handful of not for much volumes. So that was kind of a, you know, like, I guess another lottery ticket type thing, but it was at zero. When I saw that zero strike, zero struck, put trade. I was like, wow, we’ve never seen it before. And we’re, you know, we’re all guys we’ve been watching this market for a long time since, since the eighties. And, um, it takes a lot for all guys to say thing, no, this is the most amazing thing we’ve seen.

Right. I mean, you know, when we’re talking about when the IEA is talking about demand being down 30% in April, that’s 30 billion barrels a day. It’s, I mean, it’s mind blowing. Yeah. Just, just, just mind blowing. And of course at the same time, the Saudis and Russia had increased production, you know, just the, yeah. April was, was definitely one for them books. Yep. One of those months with, are in it to stay away from. Yeah. Yup. Okay. Well, let’s wrap it up. Any, anything else you want to add? We can finish it right here.