Commodity Research Group (CRG) is an independent research consultancy specializing in base and precious metals, as well energy products. The Group provides research and general price analysis for these markets, along with advice to companies seeking to construct hedging strategies.
In this podcast, oil market experts Andrew Lebow and Jim Colburn discuss key fundamental forces driving oil prices in both the futures and options markets.
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Andrew Lebow
Andrew Lebow has been involved in the energy derivative area since 1980. He began his career with Shearson Lehman Brothers where he worked in the initial formulation and marketing of the NYMEX WTI crude contract in 1983 as well as the NYMEX gasoline contract in 1985.
Mr. Lebow has appeared before the State Government of Alaska as well as the State Department of Defense to discuss hedging techniques. Mr. Lebow is also well known as a market analyst and is quoted frequently in the financial press. He has appeared on television on CNBC, NBC, CNN, CBS, and PBS. Mr. Lebow holds a BA from Lafayette College and an MBA from the Kellogg School of Management at Northwestern University
James Colburn
Jim Colburn is a futures and options professional with 30 years of wide ranging experience in commodity markets. For much of his career, at Man Financial (1989-2011) and Jefferies LLC (2012-2013), Mr. Colburn worked with major integrated oil companies, hedge funds, pension funds and other entities to develop market hedging and trading strategies.
He has conducted trading, hedging and risk management workshops in energy markets worldwide.
Mr. Colburn is a published author on options trading, hedging, market making and risk management. In 1986, while at the New York Mercantile Exchange, Mr. Colburn helped develop new markets in energy option contracts by educating the oil industry, banks, floor traders and brokers, worldwide.
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Transcription
Good afternoon.
This is Jim Coburn of Commodity Research Group. I’m here with Andy Lebow also of Commodity Research Group, and we’re here to talk about energy markets.
To learn more about us, you can check out our website, www.commodityresearchgroup.com, where we post our podcasts and blog.
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Today is June 23rd and Andy, I think what’s becoming a monthly ritual, why don’t we start out with Russia right away.
Good morning, Jim.
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Good morning. We’ll uh, start with, uh, Russia supply. Now I’ve been reading that it might be actually up from recent lows.
Yeah. Yeah, it looks, it looks like it could be slightly higher than, uh, where it was in either April or, or may before the invasion crude, uh, and condensate production was, um, you know, roughly around 11.2 11.3 million barrels a day of which over 7 million barrels a day were, uh, were exported that went down quickly in, uh, in April and made to pro to under 10 million barrels a day. And it looks like, uh, during, in June, at least according to their, uh, oil minister and also other other market Watchers that, uh, their production may have, uh, increased by, um, let’s say two or 300,000 barrels a day. So, which is not what the EU certainly wanted to wanted to see or the, or the us. So, you know, I think, I think right now, uh, Russian production is, is probably around, let’s say ten, ten, one ten two for, for both, um, crude net and condensates.
So the numbers that we had seen as consensus were basically that Russia had 2 million barrels of oil and products off the market. Now we expected, or the consensus expected, uh, a total of 3 million down the road is, is, is that still you still like those numbers?
No, uh, I don’t think that’s gonna happen. You know, what, what has happened is that that Russia has been able to replace some of, uh, its markets in the, um, you know, in the, in the EU. They certainly have been, uh, very successful in, uh, selling to India, uh, India before the invasion was taking like 50,000 barrels a day. And that that’s gone up to, uh, you know, 600 or 700,000 barrels a day. So a big increase out of India and it looks like China’s lifting more as well. So, you know, these, the barrels are at a big discount, right. And, uh, you know, they’re trading, you’re not sure exactly where they’re trading, but let’s say it’s still, you know, around $30, uh, under Brent. Uh, and, and that’s been, uh, a big incentive, uh, particularly for, uh, for India. I think, uh, you know, as to the question, you know, the IEA had said, they thought, ultimately it was going to be, let’s say a million go, I’m sorry, up to 3 million barrels a day losses.
And I, I don’t think that’s gonna be the number. I think it’s gonna be between one and a half and two, uh, million barrels a day when it’s, uh, all said and done. And maybe even closer to only a million and a half. Now the EIA sees Russian production going down to, uh, 9.2, 9.3 million barrels a day by the end of next year. So they’ve got it down. They’ve got it down too. I think, you know, as I said, I think one and a half to two, maybe the, the final number, maybe, maybe it’ll be less than that, Jim, but certainly I, you know, I’d be surprised, uh, if it, if it gets to, uh, 3 million barrels a day, so relative to X to market expectations, you know, that that’s a bearish development, you know, key will be if Euro stays discounted, of course.
Well, that’s right. Two comments. One is, is if, if I’m Russia is India, is India my friend or faux cuz they’re yes, they’re buying barrels, but they’re taking advantage of, uh, deep, deeply discounted barrels. And, uh, number two, do, do you think this is in the market already? This, do you think that’s part of what, why, why we’ve come off our highs a little bit?
Yeah, I do. Uh, I, I think that is, uh, I, I think that, and we’ll talk about the demand side shortly, but, uh, yeah, I do think that I think that’s, uh, part and parcel of the, of the, uh, sell off here is, is Russian output being slightly high, you know, higher than, uh, than market expects and going forward, it looks like it’s gonna be, uh, higher than what the market had originally ex expected, uh, as per what the IEA had said.
And, um, I know in oftentimes when we have these kind of disruptions in supply or embargo type situations, uh, countries that you wouldn’t expect to produce oil or they’d produce a little bit, all of a sudden become record producers, like during the, uh, Iraq, uh, situation, we saw a lot of oil coming outta Syria. And so you, you know, I, to simplify my question, these, do you see any slippage like that going on? Like, is it gonna be hard to, um, you know, sneak, uh, Russian barrels onto the market through some kind of backdoor, um, mechanism? Well, I,
I, is it gonna be hard? I, well, they they’ve been, you know, the, the, they have been backdooring it. I mean, they they’ve been, um, you know, following the, the Iranian lead by, um, you know, placing their, placing their barrels in different ports, you know, and sort of rebranding them as, as non rush oil is non Russian oil. And they’ve done that with, with, uh, products as well. So the, you know, there’s definitely, there’s definitely been slippage now, whether, you know, we’ll see what happens in the, you know, on the EU embargo, you know, how much, you know, how much slippage there actually is. Uh, the, the friendship pipeline is gonna remain open. You know, at least the Southern, the Southern part of the, the pipeline is gonna, is gonna still be open. But 90, you know, Europe is, is looking for 90% effective rate on, um, on Europe, on European exports, on, uh, Russian export.
Hmm. Um, let’s move over to China because China demand is really an important part of this supply demand balance. Um, they’ve gone into, uh, lockdowns and what you’ve seen, some of the, uh, estimates of, um, the, I E the EIA and OPEC. Uh, what, what’s your thoughts going forward? Uh, second half a year for China?
Well, one would think they, they should, if they come out of lockdown, you know, they, they, we should see their production up. They probably lost over a million barrels a day of, uh, maybe more than that of demand in the, in the first half of the year. Uh, one would think that they will be able to make up those losses and, um, you know, show, maybe show some growth year, year on year, assuming that there there’s no, um, you know, there’s no con there’s no further lockdowns, but then we’re, then, you know, we’re looking at, if there is a, uh, recession, a global recession, certainly that that’s going to, uh, affect Chinese distribution, exports, trade, uh, et cetera, et cetera. So I, I think there’s a lot of uncertainty on, uh, where, where Chinese demand is, is going. You know, we have it year on year, uh, up by about 200,000 barrels a day. But before the, um, year started, I think most expects were up 800 to a million barrels a day this year, or let’s say 700 to, to a million barrels, a day growth in Chinese demand. And, you know, the first half is basically taken that away. And, um, you know, they’re gonna really, I think they’re gonna struggle to get, to get growth this year. Some people are real are, you know, really bullish on, on Chinese demand. And, um, you know, they’re really bullish on price. We’re, we’re less, so much less so.
And, uh, another, another area of uncertainty is, uh, OPEC plus, uh, policy. They are have been trying to, they say, they’re gonna increase, or they’re allowed to increase by 400 or actually last night, last month, it was $600,000 a day, but they can’t, they’re not making those numbers. Can you just kind of talk about,
Oh, they’re, they’re not making those. Yeah. I mean, they, they’ve got a, uh, you know, they they’ve gotta come up with something for when this, um, when the steel ends, uh, which is, which is in September, you know, the key on the key on OPIC is as, as you mentioned is, well, there are two, two really important points. One, you mentioned number of producers, aren’t going to be able to increase production beyond where they are right now. And, uh, you know, they’re not even making their, their number, the spare capacity is in Saudi and, and the UAE. And, um, we we’ll see what, what Saudi policy is. They’re, they’re about to go up to 11 million barrels a day from 10 and a half million barrels a day where they are just about now, they’ve never really sustained that number, Jim. Right. Uh, there is some market uncertainty as to, you know, is that kind of, is that doable?
I, I, I think it will be, but the question then is, you know, there there’s fair capacity is, is only a million beyond that, or maybe maybe a million and a half beyond that, do they bring that on? And if they do, then the market is then the market is gonna freak out about no spare capacity, right? So, you know, it’s kind of a, a difficult call here for the, for the Saudis a as to what you know, where they want to produce the UAE two can, can increase production. And then we have, you know, the uncertainty Venezuela, for instance, you know, they may be able to increase production. The total just lifted some Venezuelan barrels to take to, uh, Europe. So we may be able to see, uh, Venezuela come up with, uh, some extra barrels. And then there’s the big, the wildcard of Libya.
Um, I don’t, I don’t think it’s certain what their production is. Jim, you know, one, one side is saying it’s only a hundred thousand barrels a day. The other is, is saying it’s 700,000 barrels a day. And, uh, you know, there’s, there’s been constant conflict between the east and the west, but certainly, uh, we need at least 700,000 barrels a day from Libya. And they’ve, they’ve got capacity to probably get it up over to 1, 1, 1, 2. So there could be another half million barrels a day coming from, uh, coming from Libya, which two would be, you know, is, would be, is needed. Right. So, um, you know, there’s, there’s a lot of things going on now where things are happening at the worst possible time. Right. And, uh, you know, li Libby is certainly more, certainly one of them,
You would, you would think the, uh, high price of oil would get parties together. There’s so much money involved. Right. You can, but that doesn’t always
Happen. Yeah, you would. But there’s also, you know, there’s, there’s politics of course, right. This geopolitics.
So you haven’t mentioned, you haven’t mentioned Nigeria, have you given up on Nigeria’s ability to increase production
Meaningfully? Yeah, I don’t, I don’t, I don’t think we’re gonna see a big increase out of, uh, Nigeria. I mean, maybe that maybe they could kick in 50 or a hundred thousand barrels a day, but I, I don’t, you know, I, I really don’t think we’re gonna see much more, much more from, uh, from Nigeria. So, you know, the key is where, where the, the key is gonna be obviously as always, you know, where, where Saudi Arabia goes in the, in the second half of the year, you know, I suspect they’re gonna try to get over 11 million barrels a day, not 12. I mean, that, that would really, that, that wouldn’t be beneficial for the market. I don’t think, but I, I, I think they’re gonna try to get over over 11 and we, we should see more from the UAE rack is another producer to watch. Um, there there’s, this is gonna surprise our listening audience, but there’s, there is conflict between, uh, Iraq and the Kurds, uh, as to who, who owns the, you know, where the revenue’s going. So, um, you know, that, that’s another ope producer that has that probably over the over the next few years can, can increase meaningfully over the next two to four years, not in the, not in the near term. Interesting. So,
Yeah. Yeah, there’s a, there’s a lot as always, you know, there’s a lot going on with OPEC.
So one, one quick question, you know, do you happen to know what the, uh, what the us president’s protocol is? When, when, uh, meeting royalty, are you ex are you expected to bow?
I don’t think the us, no, I don’t think we bow.
Okay. I was just wondering, cause I
Dunno if he’s gonna bow, I don’t see him bowing to, uh, you know, print prince oh, prince, right. What, and if they, you know, when, and if they meet, um, you know, I, I don’t, uh, I don’t think that’s happening.
I, you know, you, you kind of need, uh, need to follow the news very closely to figure out what the us energy policy is these days. And, um, it’s, it spins like a top and, and, uh, that’s, I’m not, I’m trying not to be political here, but that’s just what it looks like from a person who’s an independent, but anyway, let’s, uh, let’s move on. So we might not get a lot of relief from the supply side. What, what, let’s talk about the demand side for a little bit, um, these, uh, you know, crack spreads, uh, gasoline and diesel dis distillates, they’re, they’re, they’re outta sight. What’s uh, what, what happened to the old adage? High price is a cure for high price
That has not happened so far doesn’t mean that, uh, you know, it won’t Jim, but, you know, certainly one of the big factors of the we’ve discussed, I think is, is global refinery capacity and us refinery capacity we’ve shut or repurposed the million barrels a day since the, uh, since the pandemic. And, um, it turns out we, we probably could have used some of that refinery capacity to we. So yeah, we, we definitely could have used some of that refinery capacity right now is pro there’s another million barrels a day of, uh, capacity that that’s offline due to maintenances or operational issues. Um, and those are gonna come back, um, because these margins are, are, you know, they’re outta sight. Mm-hmm, <affirmative> you look, if you looked at the <laugh> diesel crack today, it was over $70 a barrel, uh, and gases in the, you know, in the fifties it’s, it’s come off some today, but you know, those are, those numbers are in, we’re talking about, you know, hyperspace type numbers.
So, you know, refiners, uh, I know the administration has been whining that refiners should produce more and believe me with that kind of with that kind of return, if they could, they would. Yeah. Uh, and they will, when, when, you know, some of this capacity come comes on, I think we’ll be, you know, we should see wholesale prices come off, uh, nicely over the next, you know, in, until later into July and August, maybe sooner than that. And with it, we should also see retail prices come off because I, I think refiners are gonna make certainly as if we look at gasoline, uh, I think they’re gonna make enough and maybe more than enough to meet what looks to be now looks to be enough, you know, some so far lackluster demand.
Uh, yeah, I, I was gotta bring that up. Um, last month we talked about how, when you, when you look at the four week averages of, of what, what is called implied demand of gasoline looked like it was starting flag a little bit. And, um, I’m just wondering, compared to last year, uh, looks like some of the indicators are, that were under last year already
Is yeah, yeah. That’s right. So we’re under last year and we’re way under the pre you know, the 2019 numbers.
And
So, yeah, gasoline is, is, demand is not, you know, has so far, has not been encouraging at all it’s early in the summer, but it didn’t look like, uh, Memorial day was, was, you know, med expectations. And, you know, I think going forward these high prices, at least they do have an effect on, uh, on demand at, at, at the margin. Um, and some people may be forced to replant their, uh, you know, what, what had promised to be a really great vacation, you know, driving summer driving season, you know, may, maybe it won’t come, come up to where, you know, to market expectations.
And it, is it the same story for, uh, distillates and diesel? Are you seeing the high prices? Cause it, it seems like that’s more sort of economy driven, but, um, are you seeing demand in those areas? Uh, flag a little bit.
Yeah, it looks, uh, the last couple of weeks were not, we’re not great on diesel, but it’s only been a, it’s only been a couple of weeks, so, you know, same with gasoline. I mean, you can’t get, you need a bigger, larger picture, but it does look like diesel demand is, is, is softening, look, you know, diesel price, diesel retail prices that the pump are also through the roof. And, and there was an excellent article. It was in the wall street journal, uh, about, you know, truckers, maybe not, not taking long as long a roof long route as, uh, they might, because of the, because of the, um, cost of diesel is making those roots. Non-profitable right. So, um, I’ll have, you know, and, and, and you’re right about, uh, certainly, you know, the one thing that gets hit right away, if we, if we go into an economic, slow down, uh, is gonna be diesel demand because that’s, you know, that’s rail trucking shipping. So, you know, if global trade slows, um, or, you know, manufacturing slows and, and there’ve been some disappointing manufacturing numbers lately, um, you know, I think we could, we can look for diesel demand to get, to get hit, which is a good thing because diesel supplies are, are still globally. They’re, they’re still really tight, you know, particularly here in the us Northeast, you know, they, they’re still way too low. Um, so, you know, we, we could use, you know, we need some relief, we need some supply and demand relief.
I’ll ask the, um, the guy who delivers Amazon packages to our neighborhood. He told me that they, uh, they have an algorithm that tells them what, where to go next and they, it doesn’t allow them to make left turns. I’ll see if the algorithm, uh, has a diesel price in there. Maybe it’s more efficient now to make <laugh> to minimize the, the, the, uh, travel distance and not so much the time. But
Anyways, Jim, it should, right.
It should.
It definitely should. That should be one of the, the big variables. Right. And the algorithm has to be,
Has to have optionality in there, Andy. Yeah. Yeah.
I don’t know about you. I don’t know about you, Jim, but I, you know, I definitely see way less Amazon trucks in the neighborhood yeah. Than, uh, you know, certainly than during the height of the pandemic. Oh
Yeah. Definitely. No. And some people are going out to actually going out to stores, but yeah, you’re right. See a lot less. Yeah. They were running over each other for a while there. Um, so when you add all this up, Andy, let’s talk about inventories and then we’ll get into pricing. But, um, what what’s we, we building, we still drawing where the heck are we in these things? I,
Well, we balance we’re building, it looks like, you know, the, it looks like the LA we’re building slightly, you know, the, the IEA talked about O E C D commercial inventories, uh, building in, uh, April and may, you know, we’re still way below where we, you know, we, we’re still, I think the number is, uh, you know, it’s somewhere over 200 million still below the, the 2015 to 2019.
Yeah. It’s 2, 2 90 0.3,
I think. Thank you. <laugh> yeah, I was gonna say two 70, but, uh, okay. So, you know, so we’re still, you know, we need to keep building and, you know, the, and I think we will, I mean, our, our numbers are, you know, we are, we’re looking for builds going forward. I know the EIA, uh, as it gets into 2023 is looking for like a million barrels a day, uh, for almost the whole year, next year. So, you know, if you believe those numbers, you know, that would be bearish going, going forward. So, but they’re, they’re, you know, these numbers is always the they’re really hard to, um, the, the, the, at least the demand side, you know, is, is hard to get a, a, a handle on it. And, and in terms of, you know, we, we’re looking for up 2 million barrels at 2.5, and I’m just about to get that, you know, to reduce that to 2.2 million barrels a day demand growth.
And it might even be less than that for 20, for 22, which would leave, you know, which would leave more room for growth, particularly if, um, you know, if we get increases from Saudi and some of the other producers that we, uh, OPEC producers and, uh, non OPEC producers as well. So, you know, we, we’re still seeing surplus. I know that we’re, you know, not on the, not on, not on the majority side, I, I know there are a lot of banks and, uh, you know, some of the wall street guys who are talking about the structural deficits, you know, our numbers don’t show it. It doesn’t mean we’re right. But, you know, I, I’m looking for looking for built.
Yeah. It’s um, there’s also, we’re, we’re, I think we’re still seeing an effect of, uh, pent up demand, uh, from, you know, being shut down for a couple of years effectively. And, uh, maybe that maybe that demand kind of tails off a little bit. It’s not as sharp. Yeah. But it remains to be seen it’s, uh, very, very, uh, highly, uh, variable we’ve seen.
There is, there is one, you know, the other big variable, you know, besides what we, you know, what we have on paper, the, the other major variable is just the dislocation. You know, you’re, you’re seeing all kinds of, um, you know, crazy trade, trade routes, developing, you know, just, just look at the Russia, India, you know, the amount of barrels going to India or, or China, uh, some of these pro trades is, you know, you just, they’re not normal. So, you know, and, and there’s the emotion, right? Are we gonna be short this winter? Right. Are we gonna have enough? So that, I think that, you know, that’s certainly lends, lends itself to a stronger market than what, you know, what the paper may indicate.
So we’ve, we’ve seen weakness include. And a lot of it, people are talking about how it’s part, because the feds getting aggressive. Now they raised rates. What 75 basis points? What, what do you, what do you thinks in the market? What do you, think’s not in the market right now, all the stuff we talked about. I know that’s a hard question.
That is
A,
That’s a hard, that’s, that’s a really hard question. I know, uh, you know, I, I, I think what’s, yeah, I, I, I think the market is beginning to discount, uh, more of a, more of a slowdown and with the potential of a, of a recession, I think it is discounting. And we talked about this earlier that Russian supplies may not be as, as great a loss as, um, as expectations. And, you know, it’s also discounting a long, you know, drawn out war with Ukraine. So, so I think that it’s, you know, it’s discounting a lot. I’m not, not sure we’re gonna get, you know, there’ve been all these 100, there’ve been a lot of, um, you know, a lot of calls on price of 150 or $200. Things are gonna have to change, you know, for that, for that to come to pass. I believe, you know, I, I think the market is, is getting more comfortable. Uh, Hey, you know, it could get, there could be price weakness ahead.
Interesting. You say that Andy, the, um, the big open interest in, in Brent options is the D one 50 call around 38,000 and the SEP one 50 call 29,000. Those are two, two of the bigger open interest, uh, strikes. And, um, maybe, um, it’s a good time to make a couple comments about options. The, um, these twenty two, one hundred call is down to 48,000. That’s the one we, we were tracking, uh, first quarter of last year, uh, when, when they, uh, somebody was building a big position in there. So it’s, um, I think, I think high of that thing got up to like 75,000, but that’s coming off, um, interesting. You still see, you know, more calls and puts trading, but, um, yesterday we started to see, you know, if I look at just Brent options, there, there were more call calls and puts, but puts were active.
There was like 81,000 puts to 112,000 and that’s, um, you know, that that’s a, a pretty good percentage of puts, puts the call volume based on what we’ve seen recently. And, uh, we’re starting to see some open interest pick up in the put side. So I, I don’t know if that’s a, you know, one of these major country hedges coming in, but, um, you know, it’s a, I’d say it’s just a little bit different than what, what we’ve been seeing. The other, um, thing going on in options is, is, you know, you have the war breakout market, you know, explodes to the upside volatility, explodes to the upside. And now we’re in this, uh, pattern where, you know, implied volatilities are high, but the actual volatility aren’t coming up to that level. So, so for now, the front month we see, um, implied around 49%, but the 20 day historicals 34, they don’t have to, you know, be related to each other for a lot of, I mean, they’re, they’re related, but they don’t have to be, uh, close all the time for different reasons.
But when, when this kind of thing happens, what we see is as you get closer to expiration, people will, uh, give up on their option length in the front month and either sell it out or roll it to the next month. So you start to see the front month vow collapse on the back month. And we saw that in, uh, Gulf war one, uh, I posted in LinkedIn and people say, we also saw that in, uh, 2008 as well. So, um, just a for, for sort of option nerds, you know, you see if that, uh, pattern continues, but, uh, what else, anything else Sandy, that you, we, we
Missed, uh, would you call, is that, is that, would you call yourself an option nerd <laugh>
Uh, I would say yes. Yes.
I think you could be. Yeah. I think you could be a, like cap a captain of the, their team.
Well, I’m always on a lookout for members, you know, that’s why I’m on LinkedIn, so, you know, and on our website. So yeah, definitely get in touch with me if you are, have the same, uh, interest, but yeah,
I think there are many, many, many, many,
Oh, yeah. That’s, it’s, it’s funny when I put this sort of, I, I don’t, you know, I don’t even think it’s esoteric, but I guess it’s, you know, it’s, it’s in the world. It’s like, you know, I’m, I’m, uh, I don’t say humble, but I, but I understand that options are at best the tail of the dog and they don’t ne they don’t wag the dog. Like some people are really into, oh, you know, look at the skew and that’s means this is gonna happen. It’s I, I’m not crazy like that, but it’s really interesting to see, watch the flow of options and the, um, you know, and you can see it show up in volatilities as to what actually is happening and compare it to the, to the rhetoric. You hear, you know, the supply demand stuff you hear every day, and you look at the look at the option market, and sometimes, sometimes you see something totally opposite happening.
Oh, that’s, that’s interesting, like early on, uh, uh, in 2020, when we saw those, uh, deep out of the money puts in the spread options trading, but with big numbers and we go, whoa, somebody’s looking at, you know, some serious can tango and, and sure enough, you know, went to minus four, uh, you know, the front one month went to minus 40. The, the spread actually went to what minus 60, I think. So somebody, a lot of people, it, it, it showed up to me that that significant move showed up in the option world first. So that’s kind of stuff I look, look for. And then like last year in first quarter, we, we saw, we began to pick up on these, um, you know, D 100 calls of the following year. And I was like, whoa, somebody’s, you know, that’s, that’s an interesting, uh, view. And, and with, with big size, you know, there’s a lot, lot of volume behind it. Anyway, that’s, um, that, that’s what I do.
Yeah. We talked about those these hundred calls for a long time.
Yeah. And then, and, you know, there’s kind of, kind of right. The market kept going higher, and then of course they get the, uh, the windfall with the, uh, Russian invasion. And then you, then you start to see the two way, two way paper flow of, you know, people, people getting in, people, getting out, stuff like that, profit taking. And, um, yeah. Uh, so moving along here, Andy, what did we, what are we anything we missed that you wanted to talk about?
Well, I think we, we missed, um, a couple of things. One is, uh, us, uh, production, us crude production, which the, um, you know, the EIA is, is we’re, we’re at 12. Now the, the EIA is saying, we’re going up to, by December, we’re going to go up to 12.6, which I, I think that’s right. You know, at least, I mean, we we’ve been under underestimating or we’ve been over, we have been overestimating. Yeah. Um, where we thought us production was gonna be, and it it’s come out, you know, lower than what, what we thought. Yeah. I, I still think it’s, it’s probably gonna be slightly higher than what the, um, what the EIA has said there, there’s certainly more, there’s definitely more pressure on, uh, some of these producers to, uh, you know, to, to increase. And, um, I think the, the administration, uh, and we we’ve mentioned that, and we don’t want to get too political on the, on this call, but there, there are certainly some things that, uh, they can do that the administration can do to, to maybe make things easier. Uh, some of these domestic producers to, uh, increase, increase output because then, you know, we need it. I mean, and I think the, the one thing that makes sense to me is to stop bashing them, you know, <laugh> and try to help them out. But I, I, I think looking at where the recount is and looking where the ducks, you know, we, we expect production’s gonna rise faster than, uh, you know, what the EIA EIA is saying.
So I, I, I think that would be it, that would be a good thing,
I assume that’s, uh, mostly coming out of the Permian that increase.
Yeah, yeah, yeah, yeah, yeah, yeah, yeah. Um, some, some of the other basins, but, you know, the per the Permian is, is, is certainly the most important basin in the, in the, um, in the us by, by far. And the other thing, uh, I know we, we talked about this is, is exports. And, uh, the, the SPR, uh, the SPR is being released by, uh, at a million barrels a day. So that’s like a, you know, fairly decent size producer. And that’s gonna go on until, you know, that’s gonna go on until, um, that’s going on until OC till November, um, of, of, of this year, which point, you know, I think we can expect, maybe there’ll be another tr released. It’s mostly sad, it’s more sour than sweet that’s being released. And we’re seeing some of these sweet diffs, um, decline. And we’re also seeing Brent ti decline. So ultimately, you know, these barrels, these SPR barrels are gonna be exported, um, which is good, which is what I, I think what the plan was, you know, right. The, the, this excess would be, you know, that, that this will be ex this will be exported onto, uh, onto world markets. So it will continue to, to be watching, uh, watching that.
And, uh, I guess we’ve, uh, we’re exporting a lot of products and, and, um, what HGS as well. I mean, it’s, yeah,
Yeah, yeah. We’re, we’re, uh, you know, what’s happened is that Mexican, you know, Mexico is still having problems, uh, in their, um, I, I think their capacity is only something like 58% Jim running 58, 68, 60%, which is really, you know, unbelievably poor. Yeah. Given where the, where the margins are. So a lot of us products are ending up in Mexico. Mexico is just commissioned a new, a new refinery that, um, you know, should be ready at some point in the future. I dunno, you know, it’s already doubled in cost from 9 billion to 18 billion, and God knows what it’ll be when it’s ready to, you know, when it’s ready to go. Yeah. Um, I think they had it at the end of next year, but, you know, I wouldn’t bet on it.
You brought up us oil production. And, uh, the other thing we didn’t mention was the non OPEC production. We’re gonna get some help out of the, I, I, did I see, was it the EIA or the IA said that OPEC production might be flat in, in 2023
Non OPEC?
No. Op OPEC plus being flat 20, 23 part part of Russia, Russia, but non OPEC.
It’s all Russia. Yeah. It’s all
Russia. So, but non OPEC is, is gonna be up a few million
Non OPEC, excluding Russia. Right. And that’s right. Yeah. From, yeah. That’s coming from us. You, us Canada, Norway, uh, Guana. Yes. Um,
In Brazil,
Brazil. Yeah. So, um, yeah, non OPEC production is, will, should have a really good year next year in terms of growth, but that’s gonna be counterbalanced by, uh, the, you know, some of the loss of, uh, of Russian. And we’ll see what that, you know, what that number is.
So do you want, do you wanna venture out and say, you know, either what, what a price range you have going to our next podcast or,
Well, you know, we were, I know we were looking for, you know, under 1 0 5 by July, you know, in July, let’s say, so that was actually a good call. Yes. Didn’t quite have the rally up to one, well, recent rally up to one 20, but you know, at least we had it, at least we had it coming off, you know,
Back to being an options. Nerd, we, we spend a lot of time looking at the standard deviation or, or the implied volatility. So when oil analysts, and there’s a couple that are out there that say, I think the price is going here. And then in six months in there, right. And then you look at the path, it took, you know, it’s right, right. Dropped by 20 bucks first, before it went up. It’s the path is very, is important, but, okay. So, so we have
Fresh start, right. So I’m, but Jim, I, I came, I came right out and admitted it.
No, no, I know. Yeah, no, that
I was wrong. <laugh>
I understand.
Didn’t quite see that. I didn’t quite see that one.
No, it’s not. It’s, it’s, it’s just as hard to try to predict what the standard deviation is gonna be derived from the market too. So no, no, I’m just saying the path is important, but so we’re, what do you think now, do you think that’s still good? Good number UN under a hundred.
Yeah. I, I mean, I, I think we could take a look under a hundred easily. The question is gonna be, you know, the market is, is to, to really sell off broadly. You know, I don’t, I don’t see that because of the lack of spare capacity. Right. I think that’s a big, you know, that that’s a big and important issue and, and it should be so, you know, a broad scale sell off. I don’t really see, you know, I don’t, I don’t see that we could get under a hundred maybe into the nineties. Um, beyond that, I think it would be, uh, it would be pretty difficult now if, you know, if demand stays really strong, stronger than what, what we think, you know, and there’s, there is no real pullback and driving is unbelievable in the us and, and globally. And the economy’s just cranking away. Could we get back to 1 15, 1 20? Yeah. I, I guess we could, but my, my, um, I know this is also gonna shock Jim Culbert, who sat beside me for, I don’t know,
Too many decades. Yes.
You know, my bias is to the downsides. <laugh> all right. Well, as, as, as usual, Jim,
It’s gonna be interesting. The, um, these inflation numbers, you know, oil’s a big part of it. Energy’s a big part of it. The, the it’s gonna be hard to sort of continue the, you know, unless something big happens to, to continue the, uh, numbers as the acceleration on the upside basically is what I’m trying to say. Right. These, these comparisons are gonna start flattening out a little bit. And, um, I, I, I can’t, it’s probably a little early to say, but it looks like we’ve seen the green shoots of a short covering rally in the 10 year note. So we’ll, we’ll keep an eye on that as well, if, and that, and that may be picking up on, you know, a slower economy and, and better inflation number, stuff like that.
Right.
Right. Yeah. So the market,
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Right. I think we covered, I think we covered a lot.
We did.
If anyone wants to get ahold of us, our website is www.commodityresearchgroup.com, if you want to get me by email, it’s alebow@commodityresearchgroup.com.
I am on LinkedIn so, you know, feel free to reach out to me.
Jim sounds good.
Thanks, Andy. See you next month. Thanks.
Okay. Thanks.
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