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 has been involved in the energy derivative area since 1980. He began his career with Shearson Lehman Brothers where he worked in the initial formulation and marketing of the NYMEX WTI crude contract in 1983 as well as the NYMEX gasoline contract in 1985.
Mr. Lebow has appeared before the State Government of Alaska as well as the State Department of Defense to discuss hedging techniques. Mr. Lebow is also well known as a market analyst and is quoted frequently in the financial press. He has appeared on television on CNBC, NBC, CNN, CBS, and PBS. Mr. Lebow holds a BA from Lafayette College and an MBA from the Kellogg School of Management at Northwestern University.
Jim Colburn is a futures and options professional with 30 years of wide ranging experience in commodity markets. For much of his career, at Man Financial (1989-2011) and Jefferies LLC (2012-2013), Mr. Colburn worked with major integrated oil companies, hedge funds, pension funds and other entities to develop market hedging and trading strategies.
He has conducted trading, hedging and risk management workshops in energy markets worldwide.
Mr. Colburn is a published author on options trading, hedging, market making and risk management. In 1986, while at the New York Mercantile Exchange, Mr. Colburn helped develop new markets in energy option contracts by educating the oil industry, banks, floor traders and brokers, worldwide.
Speaker 1: (00:05)
Good morning. This is Jim Colburn of commodity research group. I’m here with Andy Lebow also of commodity research group and we’re here to talk about energy markets 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 podcast. We’d also like to thank Doug Stetzer, our friend Doug Stetzer of EKT interactive oil and gas training for hosting this podcast podcast. You can check out his daily newsletter, podcast and learning firstname.lastname@example.org. Today is Tuesday, March 7th. Andy, how are you? Good morning. We talked a month ago about energy markets on our second podcast. This is our third one and prices are pretty much in the same place. Um, why don’t we start off by talking about OPEC, OPEC discipline and uh, maybe the u s a supply response.
Speaker 2: (01:23)
Okay. Uh, okay. Has done a remarkably good job and adhering to their, uh, November production accord. Uh, discipline has been much better than we had expected. And I think then then what the market had expected. A, they’re probably somewhere between 90 and 95% compliant with the 1.2 million barrel per day cuts. And um, you know, that they’ve done a surprisingly good job. Um, net OPEC production, if you account for Libya, Iraq and Nigeria who are not part of the, uh, uh, ran, not Iraq, um, who are not part of the, a court is probably around 32.1 or 32.2 million barrels per day. And a that is on the lower side of our expectations. So a OPEC production is, is pretty much under control, um, at least at least for now. Although there, there were some concerns in February that exports were higher than, uh, in the January number, but that may be going to a, that may be owing to a cargo or to the, that didn’t make it into a, into January’s numbers.
Speaker 2: (02:43)
But in any event, if you look at, uh, what the, the call for OPEC crude is, which is what the market needs to, uh, keep it balanced or, or, um, to, to have demand say net off the call for OPEC crude in the first quarter, taking the IEA OPEC and the EIA numbers and just rounding the Mat, rounding them out. Uh, the call is 32.1, so at 32.1 32.2, a the right there to uh, to balance the markets. So a much better job then, uh, then I think the market had expected and it has helped, you know, it has helped to keep the market steady. Remember we have run up from, uh, from mid November, uh, right after the, um, late November, right after that they scored this production agreement and we have moved up from 47 50 up until the, up until the mid fifties. So the market has made a move.
Speaker 1: (03:51)
So if you, if you were saying you were balanced now, 32, one with the OPEC call at some point during the year, um, we’re going to be drawing stocks. And probably in a pretty good way. Right,
Speaker 2: (04:04)
exactly. And I think that’s one of the reasons that this, despite, uh, the continually high inventory and these two months we were really having drawn stocks in an appreciable way. So, uh, uh, the market as you look out, uh, into late in the second quarter and then into the third quarter using these same numbers, second quarter call would be around 32.4 32.35 to be precise. But as you get into the third quarter, you’re looking at 33.3 million barrel per day call. So that’s a million to 1.2 over their current, over their current production. So then you finally get a very significant stock draw a and fourth quarter, uh, those same numbers. So we get around 32.9 33. So, so you’re looking at a second half stock draw of a 0.8 to a 1 million barrels per day, uh, which would go a long way and to remove, to removing, uh, the, the surplus.
Speaker 1: (05:08)
Now when I look at the crude curve, where, where do we start hitting backwardation? I think it’s, is it, is it each jam is the first month that we see a backwardation come into play?
Speaker 2: (05:21)
Yeah, it’s, it’s fourth AUC, Novi, Novi, these, these Jan, somewhere in there, the, the market is uh, is moving towards backwardation. Now that has softened somewhat cause it had been somewhat earlier, uh, during the month of February, I think it was set Bach or uh, August Sept. Um, and it has kind of flattened a little bit owing to the fact that a crude us crude stocks are record highs. So there is no justification. Yes. Not going, not going backward dated, but um, the, yeah, I mean the market is reflecting this, this type of, uh, this type of stock draw little later, but again, where we’re drawing from an enormously high level.
Speaker 1: (06:07)
There was a comment today, um, on the newswires, uh, by uh, Alexander Novak Foot, the oil minister of Russia saying that he expected Russia to do a show. A 300,000 barrel declined by April. I mean, is there any, are they down 100,000 right now? Where do, where do you put them?
Speaker 2: (06:27)
They’re probably down about 100 to one 50 right now. Uh, Russia was one of the driving forces in the steel along with, with Saudi Arabia. So I, I think they are going to try to comply by Novak says April. So April, May, somewhere in there. I mean, he had previously said that late in that in the second quarter they would, they would comply. I think they will. I think they will.
Speaker 1: (06:53)
And the, uh, the Livia situation is,
Speaker 2: (06:58)
where are we there? It’s, it’s fluid. It’s always fluid. And it, Olivia, uh, the, this seems to be, um, this seems to be an uptick at least on the military side as, uh, the, the opposition and you don’t even know who the opposition is and Libya anymore really. But the opposition that is in the port towns and there is some concern that, uh, some of these, some of these sports which were opened, uh, late last year and early this year, some of the exports may may be cut. Um, maybe, you know, we’ll see. Again, that’s, that’s a fluid, fluid, fluid situation. But that that could take say a hundred to 200,000 barrels a day off the market. And this also, um, some concern in Iraq in Kurdistan, once again, the government and its opposition forces, um, are um, struggling over over the, the uh, Kirkuk exports, which is about 150,000 barrels a day. And that, that’s more of a financial struggle than it, than anything else. But you know that too, that there could be a, there could be an interruption and a Iraqi Iraqi exports also another fluid situation for the market to be, to be watching also. Um, I saw a story,
Speaker 1: (08:30)
I think it was in Bloomberg talking about, uh, Iranian exports. Uh, w one day reached 3 million barrels. That’s, it was the highest since 1979. And um, it was just one day. I think the average is 2.4 or five. But um, what do you, what do you see out of it?
Speaker 2: (08:49)
I think around is there, they’re not part of the deal. No, I know. I’m so, I think that they are just going to try to maximize, um, exports. They de, I don’t see them, I don’t see their exports growing all that much. So over the next couple of months, I mean maybe, you know, maybe a hundred thousand barrels a day, um, at most, I mean they’re, they’re, they’re pretty much running at, uh, some of their Max capacity right now. Uh, so I don’t think we’re going to get at least that at least over the next, you know, next few months. I don’t think we’re going to get that much more out of, uh, out of Iran.
Speaker 1: (09:27)
Well, that brings us to the United States and there’s, is so much, uh, optimism that this response is, is greater than people thought and probably gaining some momentum right now. And maybe you could enlighten us on what’s going on in the u s
Speaker 2: (09:48)
well, uh, as we, as we’ve talked on these blogs before I made a, I made a wager with a, a a well informed crude trader. That crude production would not be over 9 million barrels a day by the, uh, by June 30th. Then I was, I was crushed on that as a production is up to 9.3 million barrels a day, uh, already, which is a, about the, if you take the monthly average, uh, February’s monthly, averaged around 9 million barrels a day, which is up about 300 from the July lows, monthly lows, average lows of about a 0.7. Uh, and um, I think production is, it’s probably set to increase. We’ve seen the rig counts. Uh, we’ve seen the rig counts grow significantly over the, over the last few months and now, um, this is just the growth that we’ve seen thus far this year or from fourth quarter into, into first quarter is a really just from, um, a few months as from the rigs increasing about six to nine months ago.
Speaker 2: (10:59)
So we really even had, we really haven’t even seen the effects of, uh, the increase in rig counts just in the last, in the last few months. And we should see crude production up, um, at least in the 200 to 300,000 barrels a day this year, if not more. American producers seem to always a surprise the market on the upside. And I’m sorry you, you know, let’s discuss that, uh, that article that appeared, um, in, I can’t remember where it appeared, but, but Scott Sheffield, the, the ex head of a pioneer. So I thought that the Permian basin was going to be bigger than the Ghawar field in Saudi Arabia. And that was the telegraph. I, I
Speaker 1: (11:54)
put that article on our, uh, on our blog because I just thought any, obviously you had to take a, an oil producer with a little grain of salt there. They’re very optimistic, but it’s this guy. It was amazing how, uh, how bullish he was. Not, not, I’m not talking about prices, but, but on the Permian basin capacity and possibilities, so,
Speaker 2: (12:19)
well, he was talking and 10 in 10 years, he thought the Permian would produce eight to 10 million barrels a day. It’s producing, you know, like two, three to four right now. Right. That’s not believable. That’s an unbelievable call. You know what, it may be believable, the terms of what we’ve been able to do in this country, you know, on every measure. And, and, uh, um, and fracked and crude is maybe he’ll be right. I mean, he had a great call and the Permian when nobody was drilling there.
Speaker 1: (12:54)
Yes, it is an amazing story. If you think about, um, you know, the, the technological advances, um, just just to get the oil out of the ground, but then getting it to market and, and it’s an amazing story of ingenuity.
Speaker 2: (13:11)
Sure. And Cim, I think you made a good point, uh, to me yesterday in talking about what, what Sheffield had said about prices and the hundred dollar level and how, and how that was probably a bad strategy by the Saudis.
Speaker 1: (13:26)
Oh yeah. Well, he said it gave, it gave, uh, oil companies the ability to use new technologies and, and um, you know, work out all the kinks and now that the oil prices are lower, they’re, they’ve, they’ve got a momentum with, with, you know, once you start drilling, you learn more and more and you, you do it better and better. So their, their cost of production has come down a lot in that, can’t remember what the, what the number was, but I think he’s, uh, some of some of his, uh, oil is coming out if the are like $20 a barrel. So, uh, they’re, they’re doing in some areas they’re doing really well with $50 barrel oil. So
Speaker 2: (14:06)
yeah. He, he called 50 to 55. The sweet spot. Sweet spot. I know. It’s just, I think it was 25 was they’re breaking even costs 25. Yeah.
Speaker 1: (14:16)
So, um, the EIA is coming out with their monthly oil report today and I was just wondering, do you think they’ve been a bump up the uh, their estimates for US oil production?
Speaker 2: (14:27)
Well, they’re going to have to be wrong. They’re wrong already. Yeah. That eight, eight or eight nine I think it was. And it’s over nine, so we’re nine. Yeah. Almost certainly there. They’re going to, uh, increase the numbers. Right. Um, you know, and I don’t think they had a solver nine until, you know, later in the later in the first half. So, yeah, I think they’ll, they’ll get, I think it’ll go up to nine one, nine, two, nine one five, somewhere, somewhere in there. And they’ve been on the low side, you know, they’ve consistently underestimated, uh, production. So, um, you know, the probably continue to probably continue to do. So
Speaker 1: (15:11)
let’s move over to a demand. Um, you know, maybe we could focus in on gasoline demand because that’s been a little, uh, uh, surprising I’d say in the last four to eight weeks. And it looks like we have gas, gasoline demand maybe 6% lower than last year. Um, comment on on that.
Speaker 2: (15:32)
Well, it can’t be, it can’t be, you know, you take that 6%, um, which is the, the weeklies relative to the monthly’s year ago and, and you know what’s even more surprising? It’s down like 8% from November, December versus January, February. So it can’t be, I think that, you know, I think that gasoline demand is probably soft. And in talking to some of our clients, you know, they, they have acknowledged that, yeah, it’s soft, but it’s nothing like 5% lower. Um, I think it’s probably, you know, maybe the real number is going to be one to 2% lower than year ago and the reasons for that are, um, you know, pump prices are higher and, um, yeah, I don’t know if there’s any economic reasons or social,
Speaker 1: (16:25)
the anecdotal story is that everyone’s watching Netflix eating dominoes pizza and not going to the empty malls anymore.
Speaker 2: (16:35)
And that may, that may contribute plus staying home watching CNN or Fox or Fox, right. Either one eye, but getting back to the EIA that what’ll happen is there’ll be revising demand upward, but that doesn’t happen for till two months from now. Um, but you know, it can’t, it can’t be as bad as, or they’ll make it up in March or April. Uh, but it leaves us refiners did not want to get into the fixed they got into last year when they made too much gasoline, expecting a, a banner season and they did get a good season last year. Gasoline demand was good, but they made way too much and inventories for like 260 million. They built it to 60, in January and February and this year they, the same thing happened to them. Even though they made less gasoline, the yields were at were way down. Exports were pretty solid. So, um, you know, this was more on, uh, on the, uh, on the demand side.
Speaker 2: (17:42)
I happen to think the inventory numbers, you know, that may be a revise down a little, but that’s usually the most accurate out of any of these, you know, any of these variables. Um, so it, it does leave gasoline and the in a pretty precarious position if demand doesn’t come through in, uh, you know, the spring. Now as far as we speak, the market’s rallying nicely. Um, I think it’s probably, you know, I did get oversold because it really got whacked in the first few trading, last trading days in February when they tried to offload all the winter grade and the first days and uh, you know, in March, um, it’s not coming back some, but you know, that’s going to be, you know, that that’s really going to be a function of demand and whether or not, you know, we, we start seeing some decent demand numbers coming through. Uh, the other important factor is going to be exports and a exports have been pretty solid and the main reason has been because of infrastructure problems in South America and in particular Mexico. But, um, pemex is running only at like 50% capacity. Uh, if they were to get their act together and start fixing some of the refineries, clearly u s export demand, this is going up, it’s going to soften and that, and that could be a problem. But you know, it hasn’t been so far.
Speaker 1: (19:07)
Um, you mentioned that last month they asked you if it was a, the economies of those areas growing and you said no. Is, uh, uh, infrastructure, uh, uh, problems with the refineries. And I’ve seen that in the, in the news, uh, over the last month more and more. So I would keep an eye on that. I guess we’ll have to find out, uh, find that an expert in Mexico that can tell us how, where they are and the repairs and stuff cause that cause that’s going to be important.
Speaker 2: (19:34)
That’s going to be critical. That’s a critical factor because you’re, you’re looking at, uh, you know, you’re looking at a hundred, you’re looking at the marginal barrel going the marginal gasoline barrel and that’s going to have to find the homes somewhere.
Speaker 1: (19:51)
Um, world demand for petroleum and products. Uh, you think there’s going to be any adjustments this month in the big three a, the IEA, OPEC and the EIA Eias a monthly reports. Um, there’s been a lot of good economic numbers around the world and um, you know, I don’t know if that’s going to translate into their demand numbers.
Speaker 2: (20:16)
I think that, um, I don’t know if they’re going to make major, uh, major changes. I doubt it’s going to go up. Uh, you know, even though the, the economic numbers have been pretty good. I think there are, the IEA mentioned yesterday that the, there were some headwinds on demand and they worried about the rise of nationalism and protectionism, uh, being, uh, you know, could be, could be a headwind to, uh, to demand that I think world economic growth. The, um, maybe we’ll see the OACD yesterday was, was talking about that as a, as a headwind to, to Lobel growth, not necessarily the IEA. Um, and they had, they kept their numbers pretty steady. So, and in terms of a change in terms of global chief, I really don’t think this can change.
Speaker 1: (21:13)
Yeah, it’s interesting because I just, uh, saw the GDP, the Atlanta fed does that GDP now cast, right. And they’re looking for a growth GDP growth of this quarter of 1.8%, which, which is a low number, but it’s also a, the lowest estimate that they’ve had since they started estimating is this quarter. So, uh, yeah, I, I keep hearing all this good stuff about flow of economic growth, but it may not be a, in an accelerating mode. We’ll have to see how that plays.
Speaker 2: (21:46)
I think it’s steady and I think China just, uh, um, decrease the rest of them. It’s by just slightly, which could affect, obviously is going to affect the emerging markets. So, uh, we’ll see. I think, I don’t think there’ll be big changes. I think there’ll be steady.
Speaker 1: (22:05)
Okay. Um, another area of the markets that we have been looking at is the managed money length. I mean, it’s, uh, I think in Brent it’s up around 500,000 in Wti think it decline this week, which still up close to record highs. Um, what do, what can we say? What can we say about that?
Speaker 2: (22:29)
Well, the one thing to say about that, and I think we were talking about that last week between the two of us and, and I wrote in our, uh, in our monthly report that if you look at the Wti, the longs to shorts, um, last week the, the length was a 450, 3000 to only 39,000 among, among the specs. So no one was short the market. No Way. Right. That’s really, you know, in terms of specs, that’s an incredibly low number. It’s like an 11 to one lat long to short. And usually you get that, you know, you get that, that type of imbalance when no one short, you know, which way the market’s scholared. Right. All right. It should go down. Go down. Yeah. It’s holding, I mean, you know, in the market is hauling, it looked like it was going to give way.
Speaker 1: (23:26)
The only, the only thing I would say the CFTC used to do a survey of how much of this stuff was, uh, uh, the passive and index buying. And they don’t seem to do that anymore. And I’m, I think it’s, that stuff is getting caught up in this manage money link. So it’s not like you typically, you buy futures contracts, you buy them on margin and if the market drops a little bit, it spooks a lot of people out. And they’re also the, uh, the trend followers get out and, um, it kind of feeds itself on its own movement and we go lower. But these, these guys that are, um, you know, if you’re, if you’re a pension fund, um, you might get a invest a small part of your portfolio in this, a passive long only strategy. And in that case you’re, you’re, you’re, you’re applying 100% a year.
Speaker 1: (24:20)
It’s kind of like you’re buying the whole contract. Yes, you put up it’s futures and you put up 10%, but the rest of it is, is sort of a, a portion to that, um, investment. So, so you’re not going to, in fact, it seems like these folks trade like value investors. So when the market comes down, you know, they’re, they’re looking to get in and when the market goes up, they’re looking to get out. So it’s not typical of, of what we used to see for these, uh, managed money. Uh, you know, trend follower types. And, um, and now if you listen to some of the chat going around, we’ve got this reflation trade, the commodity markets, um, there, at least when we look at oil, it’s, it’s moving towards backwardation and you think about a passive only investment. If we have backwardation, they, they, uh, they earn those returns because they’re buying, you know, say a the second month out and what it becomes first month, they roll it.
Speaker 1: (25:20)
So if they’re getting on that, uh, you know, uh, backwardation role there, they’re earning, you could have a flat price and still make money as long as you’re in backwardation. And, um, also the, the correlation is going away. So it’s a, uh, it’s a good diversification investment for these, uh, big pension funds. So, so I think, you know, we’re starting to see, so, so my point is we’re seeing record numbers and, uh, I don’t think we’re going to be able to shake them out as easily as if those numbers were that typical, you know, speculative, speculative length, uh, that these guys are longer term players and you can’t eat, they’re not, it’s not like their leverage up and it’s a small part of their portfolio. So it’s hard to squeeze them out. But, um, but I agree with you. I said, I think this is, it’s, it’s, we haven’t seen these numbers before and then record. And so you, you know, you, if you were buying the market now you kind of feel like you’re the last one in,
Speaker 2: (26:24)
right? No, they’ve been, they been a law had been that long for months now. And they’re really, you know, the market has, has some performed. And Jim, as you mentioned this last week, we started seeing the net length get, uh, get paired. Uh, and Wti actually added some shorts finally to the, to the market and some of the, and some of the length was, uh, taken out. And in Brent, the same thing. Um, Brent loss, the net length was down 38,000, which is a pretty big number. So I think that you get some, definitely have some tired and disappointed longs in there. But I think the point you make, Jim, is really good that, um, you know, some of this length is here for, is here to stay and they’re not going to be easily shaken out.
Speaker 1: (27:12)
Right. And the other thing that this brings up as if you were to look at a, uh, like a contrarian view on this market, it would be that coming out of the summer, we’re around $40. I mean, that’s kind of, to me, they’re just, the market’s just seems to have this 50 to 60 range built into it and in a big way. And um, you know, you could, a lot of people expect us to be up at 60 bucks at the end of the year. I think you have that view as well.
Speaker 2: (27:45)
Yeah. All right, well if you look at what we talked about on the, uh, you know, as we head into the, into the second half and the market’s deficits, I mean, these numbers are not a surprise to anybody. I mean, everyone has the same numbers. I mean, that’s why we’re, that’s why we’re holding here. Yeah. And I agree with that too. I’m right there record inventories hanging in here and I agree with that view as well. But I’m just saying,
Speaker 1: (28:13)
if you thought, well, what’s, what’s the view that people would really be shocked to see? And I think it’s a lower price coming out of the summer, but
Speaker 2: (28:22)
definitely, and that could happen. Let’s say, you know, I’ll pick, doesn’t, doesn’t roll over the agreement at the end of May. And let’s say, you know, the, they’re not going to roll over the, they don’t roll over the agreement today and use than, um, I think it was the Iraqi minister and the Russian minister, the, it’s big Syrah week down there, um, all said, it’s a little too premature to talk about a rollover. So you know, if they don’t roll it over, I, you know, in the market is obviously some of this like this is going to get shaken out.
Speaker 1: (28:58)
Right. And you know, that leads me right into, uh, my favorite part of the market is in the options world. And, um, we’re seeing, uh, an implied volatility, 22%, 23%. Um, and we haven’t seen these numbers since early 2014 and in June of 2014, we made an all time low at 12.7%. Um, but also coming out of June, the end of June, it was a viles were up in the 50%, because obviously we had that big gut collapsing in price and that compares with the long term average of 33, three. So it’s a very, you know, as we said, that prices move pretty sideways once it bumped up. Um, and I think the OPEC agreement, um, put an effective floor, uh, on this market. So, you know, the, a lot of times the implied vol is driven by, uh, uh, aggressive put buyers, but, um, you know, they probably weren’t around.
Speaker 1: (30:02)
Um, they’re not around as much as they, they, uh, uh, could be. Um, but you know, you think about the view 50 to 60, and that’s exactly where we’re seeing all the, uh, the bigger, uh, strikes of open interest. So, uh, for example, in the, uh, the biggest, uh, open interest in there, in the regular, the, uh, we call them the Elo options, that’s a symbol. The WTI options. The June 60 call is over 50,000 open interest. That’s a, that’s a hefty number. Uh, and, and number two is December at 48,000. So you can see, and even sepp 60 calls, those are the ones with the big open interest. Um, so you can’t, you can’t buy those without cellar. It was what the sellers, so, uh, there’s people on both sides obviously, and uh, because viles have declined, it’s in prices haven’t gotten up there.
Speaker 1: (30:55)
It’s the sellers who are probably, uh, making the money right now, not the buyers. Um, and, and part of it, some of those sellers are probably producers when they’re, when they’re financing their put purchases, they sometimes will look for a cause to sell against it. And on the put side, it’s all the 50 puts, April, May, June, Cep, D’s that those are the ones with the bigger, you know, they’re not in the 50,000, but they’re more like 20 to 20, 20 to 30,000 open interest on the 50 puts. So, so even though the option market, the vowels are down, the volumes down, um, you can trace out sort of the consensus, uh, view, uh, by looking at those, the open interest numbers. Um, and moving over to our, one of our favorites, uh, that DCE 18 call, uh, Brent Wti, the flat call or the zero call is now up to 54,700 and open interest.
Speaker 1: (31:55)
Wow. So that these 18, uh, calls total has got 76,500 and that’s, that’s the import tax play, right? So you buy that. If you bought that flat call, you’re expecting Wti to trade a above Brent. And that’s, that’s just amazing. You know, that’s the number one option that’s related to crude in terms of open interest. Right? That’s the whole, that’s the border adjustment tax play. More tax play. Yeah. And you know, if you have, you know, you have a commentary on that import tax every day, it’s, it’s a go, it’s a, how are they going to balance the budget if they don’t have this tax? And then there’s too many people against it. So it’s a really, you know, uh, it’s, it, it can, if it was a, um, if we were closer to having it in an enacted, I’m sure that that market would be flying all over the place, but it’s still not quite there yet. So, um, yeah, but it keeps, it keeps, it keeps gaining in open interest, which is just shocking to me.
Speaker 2: (33:03)
Well, as you said, people probably think they, they have some good information about whether it goes or not the changes every day. So, uh, interestingly that that spread, which went from minus to Wti minus $2 to Wti just about flat or it was not over, is now WTI down about a buck tawny.
Speaker 1: (33:27)
Right. Probably reflecting a probabilities of that thing getting passed. Right, right. It’s interesting. You know, I was trying to think, um, it could be a spec play, but it also could be a hedge. And, and if you think about who would, who would get hurt by this spread? It would be, you know, together Brent and Wti. He’d say, okay, well it would be a Brent Brent producer or producer of oil tied to the price of rent and the u s and a s refiner. Right? So the WTI price rallies. So if you, if you have a company that has that exposure, which there are a few out there, you’d think that they, that would be a good play for them to, uh, to that call would be a good buy for them to hedge against, uh, an import tax. But you know, who knows, I have no idea who, who actually both that thing.
Speaker 1: (34:18)
Um, and then finally the, you know, we talked about the, the curve and um, people play the curve, who option markets, a little comb, CSO is there, there the options on the spreads. And so the, the one month spread would, would, would be say a, you could buy a flat call on the June, July spread. And, um, the, the options that we see with the most open interest happens to be the goat. For Awhile. They were the minus 50 puts for 2017 and July through deeds minus 50 puts, still have like 12 to 17,000 open interest. But now we’ve moved up to the minus 25 puts. So, uh, July has about 15,000, uh, uh, well from, from, uh, out through d. So you can, you have anywhere from a what’s around, there’s around 15,000 for the minus 25 puts in, in July and then in Novi and d. So that would be like no v Ds spread these chance, read the flat puts of have got up to 19,000, uh, open interest. So you can see it just keeps, the market seems to be getting a little more, uh, um, I don’t know, confident that this, these draws are going to happen against all the stuff that I’m talking about now. And options is kind of a, uh, mix. It’s feeding into what your, what the consensus view, uh, is saying. So, um, okay. What else? Sandy, what else did I miss?
Speaker 2: (35:54)
Well, let’s talk a little bit about, I think it’s, yeah, we’re in March right now. It’s just, it’s a shoulder month. Their big main that says going on and uh, in Asia right now, the u s maintenance are um, have by and large are, are coming to a, to an end. We’ll end by the middle of March. Um, so, you know, for the, for this month it’s not, you know, it’s not all that, it’s not all that interesting. And I think, I think the market will be hard press release to break out of the, uh, out of the range. But the big question, Jim is, as you alluded to is, you know, as we start getting into closer to the period where it should draw, you know, how’s the market going to react? How is it discounted? Is it going to be this fast and furious rally? Is it going to be a Herky jerky rally?
Speaker 2: (36:53)
It’s a kind of, you know, there’s a lot, you know, I think that’s the big, that’s the big question. Of course, markets go up and down and not as what we spent this market scan very comfortable. Um, you know, just, just being in a, being in, in this range. Um, I think it’s going to look, it’s definitely good a need for clarity. You know, the big, the big hinge is going to be what OPEC does. So I, I, you know, I think as we head into April and May, you know, we’re going to have to start seeing something from a OPEC on the, uh, on the rollover to give the market a little more. Uh, you know, we somewhat more, uh, more confidence, you know, until then, we may just, you know, we make to stay in this stay range bound, which is not great, but, right.
Speaker 1: (37:41)
Yeah. I mean, as we could stay in this range for a later time, I do worry, despite what I said about the passive index trading, I do worry that, uh, there’s so much length in this managed money, uh, cohort that, uh, you know, it’s, you just feel up. I mean, you just feel like you’d be the last one in. And I worry that even if bullish news came out, you know, who’s, who’s left to buy, you know, he’s on the other hand, um, you know, when, when, if, if you start seeing stocks draw, like we think they could, you know, people might say, holy cow, let’s, let’s get, let’s get grandma out of her t bills.
Speaker 2: (38:24)
That’s good. Yeah. You know, we start seeing these crude stock draws every week on the yeah. On the dos, right. The market’s going to get, it’ll take notice. This just how excited does it get? Um, you know, I’m not sure. I’m not sure either.
Speaker 1: (38:44)
One other thing that I’d been looking at is this a 10 year, uh, uh, interest rate. It’s, it’s right around two and a half percent. And you know, if you go back to the high of the Reagan years that we’ve had this huge decline in interest rates. And even in 2000, 2008, uh, we got down to two and a half percent, 2009. We may have gotten a little bit below, but it was two and a half percent was good support back then. And then when we started doing the [inaudible] stuff, we blew through it on the downside and now we’re bouncing up against it. I think. I think we were two, two and a half percent pretty much for this year. I to, I think around this year or last time we were probably going to 10% but if this thing starts, you know, going above breaks out of this resistance, I mean this, this thing could fly up and then cause some problems with the stock market. And then, you know, I, I, you know, it’s an old see it happening, but it’s, it’s out there. So I’m basically looking for what would cause the consensus view to be a totally surprise in it. And that would be another area to keep an eye on the Saudis, the back ends of the interest rate, markets react.
Speaker 1: (40:03)
So, but there’s a lot of it, there’s a lot of economic momentum. You know, he’s hard to, uh, w we’ve got more people that work this year than last year and a lot of those people are driving. So you know, it’s, it’s, it’s a, a consensus view may be actually a correct, everyone’s 60 at the end of the year.
Speaker 2: (40:24)
Okay. Anything Handy? A lot of ground. Let’s hope that the market does, does find a way to break break out in this range. Yeah. One way or the other and uh, but you know, for now at least during the neck, you know, during March it’s really hard to uh, you know, for see it making a really dynamic move unless something changes in the, you know, for the next, uh, over the next couple of weeks
Speaker 3: (41:00)
I’d be interested to take a look at the via stuff tonight, their monthly report when it gets what, what time does that come out? Around one, I think around 12 or one o’clock. Whenever one. Okay. Very good. Okay. Thank you very much for listening. I’m going to end this podcast with a disclaimer. This podcast should be construed as market commentary, nearly observing economic, political or market conditions is not intended to for to any particular trading strategy. Information contained in this podcast is accurate to the best of our knowledge, but is not guaranteed. This is not an offer to buy or sell, and he’d do it and we’ll see you next [inaudible].