Commodity Research Group (CRG) is an independent research consultancy specializing in base and precious metals, as well energy products. The Group provides research and general price analysis for these markets, along with advice to companies seeking to construct hedging strategies.
In this podcast, oil market experts Andrew Lebow and Jim Colburn discuss key fundamental forces driving oil prices in both the futures and options markets.
About Your Hosts
Andrew Lebow
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
Correction: This podcast was recorded May 13, 2020 instead of May 12th as stated in transcript.
Good morning.
This is Jim Colburn of Commodity Research Group. I’m with Andy Lebow also of Commodity Research Group and we’re here to talk about energy markets.
To learn more about us, you can check out our website www.commodityresearchgroup.com where we post our podcasts and blogs.
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This podcast should be construed as market commentary, merely observing economic, political and market conditions and is not intended to refer to or endorse any particular trading system, strategy or recommendation. We are not responsible for trading decisions taken by anyone, especially those not intended to listen. Information is not guaranteed to be accurate. This is not an offer to buy or sell any derivative.
Today is May 12th. Good morning Andy.
Good morning Jim. I just want to start out you know, we just, we haven’t talked to each other in about a month on the podcast and there was a telling stat or event on April 21st. This would be the day after that prices went negative, where a 50 cent put traded for dollars. And what that did was it basically blew up the Black Scholes option model. Black Scholes option model assumes prices can’t go negative and here’s a zero put trading for more than $4. So basically if you did the implied volatility calculation on that thing, uh, you’re getting, it either blows up or you get some crazy thousand, uh, many thousands of, of, uh, of our points as a, as a solution. My point is that this world that we’re in now has gives everyone an “Oh my God” type of statistic.
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You know, if you’re a macro economist, maybe it’s the weekly claims data or the unemployment numbers but for me it was to see this, uh, uh, option model. Now the model itself has had problems and you know, it’s, it’s a mathematical model trying to replicate real what’s going on in reality. And obviously it’s failed many times in the past, but this was, this is a major, uh, a failure of the model. But, um, anyway, kind of describes the kind of market we’re in. And to a big it to today. We, I thought, I saw another stat that was interesting in the weekly EIA petroleum numbers and that was in Cushing, Oklahoma. We saw an actually a draw in crude oil and I just, let’s start out with, you know, what is that all about? Well good morningJim and hello to everybody. It’s been a pretty eventful a month. But before I start to talk about Cushing, so Jim on that 50 cent, yeah. What’s your breakeven?
Yeah, it’s, it’s uh, well it’s my minus three 50, right?
Yeah. Minus three 50 no, somebody was willing to pay $4, right. Thinking that crude was going to go back to two minus three minus three 50. Yes. Now the minus $40 price that we saw the previous day, there were the, the option markets had already expired. So there, you know, you couldn’t, even if you had a negative or zero struck put, you wouldn’t have made money cause it was gone. However, the spread options had about 63,000 open interests that puts, that were deep, deep in the money. And I think people, I think people miss that they saw a lot of open interest. Like I think we went into that day with about a hundred thousand contracts open on the, on the may contract, not really realizing that maybe, maybe 60, close to 65,000 were already spoken for, so it wasn’t as liquid. And then of course, you know, you have, I don’t know how you can have somebody with, uh, maybe 30 cents in their account trading hundreds of lots of a contract that has two days to go. But, but it looks like there was some of that going on around the world that he’s day traders were, uh, we’re still in the market and got caught. So anyway, um, yeah, I think, I think there’s definitely a failure to, uh, police on that, uh, by, you know, the FCM C exchanges, CFTC, whoever you want to, whoever you want to blame. But in the individuals, I mean, who didn’t understand what they were, what they were trading. This is, this is a layup in risk management. I don’t, you know, you gotta be, you gotta be kidding me, that these folks are allowed to trade that, that close to expiration. We didn’t even want our, our major oil customers doing that unless they had, you know, something, some interest in the, in the delivery process. We wanted them out as well. And these guys were well capitalized. So yeah, it was, it was a debacle all around. Uh, I don’t know if we want to do this on this podcast, but I, I guess with all your experience in these markets as my question is, has the, has the collective IQ cut better or, or worse or unchanged?
Hi, that’s an excellent question. Has a better, worse, or a on shades? Well, I think the more we learn, the more we, uh, the more we don’t know. Right. Uh, you know, I think you and I have been around for a long time, know, thought we’ve sent, we’ve seen everything. And, uh, I think last, last month definitely blew my mind. And as you were saying, you know, it’s just somebody who buying that put, you know, it had to have blown your mind. And, uh, you know, just an unbelievable series of events. Yeah. That could, you know, who knows, it could happen again, you know, in previous podcasts we, you, you say often that anything is possible. And I know when we had Andy from Anon, we talked about the possibility of prices going negative and I, and I think we came out of that discussion as yes, they could because we’ve seen them in like grades and other commodities. It happened. But, but even if we thought w w it was a low probability we attached and also we never would have said even minus 40 price or minus 37, you know, so I think that was an Oh my God moments for sure.
That was definitely an all my God moment, you know, right up there with some of the other, Oh my God, Bob Minson in the 40 year history of, uh, of uh, yeah, I recall a, uh, during the Gulf war one where somebody on the floor called me to say they had a, somebody was short a put-spread. It was like a, I don’t know, four or $5 wide put spread. And the market was collapsing and they want it to pay more than what the put-spread was worth and it would ever be worth. And the trader in this broker said, you know, if I ever executed at that price, I’d go directly to jail because, right, right. But uh, yeah, so I thought that was Gulf war one was probably a the closest to this, but this is, you know, we’ve talked about this before. It’s a double whammy of a supply shock and a demand shock.
You know, you know, you take the, um, the major oil companies were in in some ways were internally hedged where they, they not, not off the, around the world and a lot of different businesses, natural gas chemicals. So you know, if, if one part of their business was not doing so well, there’s probably something else that was doing well, uh, is not the case right now. So, um, anyway, with that, let’s talk about what’s going on now. Yeah, let’s, let’s talk about what’s going on now because there’s been some changes even since we went negative. Certainly. I think the big, this is on both sides. On both the supply and the demand side. You know, we’re, we’re seeing some, uh, yeah, there’s some positive developments. Um, perhaps to me the most positive development has been these production, not only by the OPEC and OPEC plus countries, but by the non OPEC countries who are in part yeah. Of that group. And in particular the U S and Canada U S production on a weekly basis probably peaked at a weekly, it was 13 one monthly, it’s probably going to be 12, nine. And in this week’s weekly petroleum status report, uh, it was down to, uh, 11 six, so that’s already down 1.5 from the, you know, the highest weekly, a 1.2 from the, um, you know, highest monthly. The EIA is saying that we’re going to decline another three or 400,000 barrels a day in the, in the short term that was in the, um, short term energy outlook. And we’re going to continue to decline to 10.7 million barrels a day low in March of, uh, of 21, uh, which would be down, you know, over 2 million barrels a day.
Some people saying that that could be faster, you know, the decline could be the declines could be faster than that. They have a six month lag that, I mean, they roughly say prices and production show a six month lag. So yeah, but that’s not been the case here, right, because production is just falling right off the shelf. Right. And, uh, you know, it’s happened in all the, you know, in the Bach and the Permian. Uh, and besides the U S candidates as well, the production could be down a million barrels a day by a mid year. And I think, you know, we’re seeing that in the, some of these grades, uh, on the physical market like West, like the heavy Canadian great. WCS, it’s only like $2 on the Cushing. That would, that was like 15 to $20 on there, uh, earlier in the year.
Uh, and again, I think that that’s, that’s a fat, the factor is production is down in this room on the pipelines, you know, similarly, um, the Midland Scott and really strong and, and uh, Euston great is, is, well that’s w T I use them, but you know, all these grades are picking up. And you know, as you mentioned Jim, we saw stock straw at Cushing when all we’ve been talking about is stocks building and building. And I think the reason we were talking about stocks building and building at least, you know, in some of the, in my own balances, you know, I didn’t have production down quite that fast. So that, that’s, you know, that’s been supportive though. No question that, that’s been supportive. Yeah. And you know, when you look at the, um, again going back to those commodity spread options, the flow that we’ve seen since, you know, basically April was just the turnaround people started those puts.
And, um, we’ve seen strips of a plus 25 cent calls in 2020, but we also 2021. So that’s kind of, if you’re buying that call, you’re betting for backwardation to come back, uh, very soon. And I mean there’s, there’s still oil out there, right? Or are we going, we just flipping right into backwardation again? No, I don’t. Uh, well anything’s possible. Yeah. Could this go backwardated if we can go to minus 40, you know? Yeah. The structure could go backwardated I don’t think it will, uh, because even though we had a draw inventory, it’s still high. Uh, there is 40 million barrels of Saudi crude on the, on the way. Uh, there’s been some delay in bringing that crude into, um, into the refineries, uh, owing to some shipping, you know, some shipping issues of, from taking our holes from the LCCs onto smaller ships to the refineries.
And those smaller ships are a little bit, yeah. Yeah. They’ve been harder to find. So there have been delays on that, but they’re out there. They’re, you know, they’re, they’re coming. And, um, the other thing we’re seeing is runs, you know, crude runs, we’re down this week, so demand the least from crude runs perspective. Yeah. It was still still struggling there. There is an improvement, no question on end user demand. And that makes sense. I mean the, the, you know, the, the country’s opening up slowly, but, um, you know, the, the gasoline demand numbers are, are uh, increasing diesel demand is up. This is still dreadful, you know, compared to where they compare it to where they could be or, or, or last year. And, um, you know, the, the, we still have, we have a way long way to go. So just a quick, uh, perspective, um, gas demand is running about now.
What, at what levels compared to last year would you say? We’re running? Um, well this last, last weekly and again, you know, you can’t, can’t get that crazy better weekly, but the last weekly was 7.7 million barrels a day. The EIA is saying that made demand, uh, may 20 demands should average 7.24 last year. May was 9.4. So we’re running good. If that’s seven to four hole, it was right. You know, we’re, we’re running, what is that over 2 million barrels a day below last year. And I think it’s even, you know, it’s going to end up being lower now. In April we were running about almost 4 million barrels a day. I mean, April, since April was the worst month probably ever. Uh, I shouldn’t say ever. I mean maybe in the 1860s or depression it might’ve been worse, but you know, April by every measure was one of the war, one of the worst months, if not the worst month ever, you know, um, on both the supply and the demand side.
Yeah. I’ve actually filled up my tank in may. I didn’t do it and touch it in April. Right. So yeah. Yeah, it’s definitely opening up. But you know, whether or not gasoline demand is going to, uh, get back to last year’s levels. I think it’s going to take a long time. I saw one of those TSS somebody put out and one of the stories was about the TSA, uh, activity at the airports and they, and they show, they’re talking about the green shoots and it was, they had a beautiful chart showing how it’s bottom and now it’s moving higher. And then in the same story they mentioned, however, it’s still down 90% from last year. So [inaudible] looking better coming off of a dismal number. Right. That’s, that’s exactly right. And um, you know, may, maybe the summer we S we start seeing what the EIA is saying is demand is only going to be down a million barrels a day from last year of over the summer.
I mean, maybe, maybe they’re thinking, you know, people are going to drive on vacations but you know that that again is going to be predicated on, you know, what happens with the, with the virus and hotels and parks and everything else. Nevertheless, yeah, demand is improving and supplies being caught and you know, hence prices have been moving higher. That’s I guess the good news. The bad news is even though we split dry, dry and Cushing, we’re still, you know, way over supplied and um, know both, both products are way over the diesel. I’ll talk about diesel in a minute, but you know, products are way over supplied. And DIA also says that in the short term energy outlook, gems, they also say that crude stocks are just going to balloon in may and June. You know, they have, they have stocks getting up to 580 million from a, I don’t know, I think we’re five in the five thirties now.
Bye bye. June. Uh, I don’t think that’s right either, but you know, if it is, then get them where, you know, we’re back to bigger contango so we’re back to talking about containment problems. We’re kind of in the eye of a hurricane maybe. Yeah. Yeah. So, you know, even though we’re seeing, well, it’s not, uh, you know, it’s, it’s going to be difficult for this market to really sustain a, uh, you know, sustain much more of an uptrend than mine in my opinion. I mean, the other, the other thing, well, let’s talk about structure for a little bit. There’s a hundred, there’s 150, 200 million. You know, people have different numbers of floating storage out there, right? What happens when the market, if the market goes backwards, right. That’s just, yeah, that’ll, that either puts a lid on it so it doesn’t go back with David or it just just comes off the market.
Right. I mean, all these, all this, all these, they’re going to try to unload at the same time. You know, I was wondering, and that’s another, you know, that’s another, the problem with this market really. You’re not really sustaining itself. I was going to say, I wonder if that is the, you know, the Saudis cut another million barrels. Is it because they, now you wonder how much of a, is it policy or, or they’re seeing seeing the reality or both. Where were they? They can, they don’t have ships to fill fill anymore and they don’t have a customers to buy their stuff’s in that. Oh, we have to cut them. We better cut a million barrels. So, Oh, I’m sure that’s the case. I don’t think it’s, I think it’s, you know, how they operate. They always talk about how they’ll give what the market, you know, what their customers demand.
Right. Um, so it’s, it’s certainly possible that that billion barrels today was cause there’s not enough demand for there crude. Now, you know, if you look at Asia, China has come back and that that’s, that’s good. But you know, in the, uh, run slow increase, but you know, that’s another interest thing. Yeah. They’re talking about Indian Indian demand increasing by 25% in may over April, but it was cut by 50%. So it’s going to increase, but it’s, you know, it’s from a much, much lower level. Do you want to talk about gasoline versus distillate? I mean, gasoline looks like it’s starting to draw. Dislet was, was doing well now it looks like it, it looks like they flipped or starting to flip in terms of um, no stock levels growing in now. Gasoline declining. You know, Jim, I looked at one of your favorite spreads to gas right before our podcast.
The heat to gas spread, you know, affectionately known as the widow maker. Uh, it went from gasoline in April, 55 cents on there, diesel to gas, 5 cents over diesel. So it had a 60 cent well spread, a 60 cents change. And that’s a, you know, the June contract. So, yeah. And now what happened is for, uh, it’s really a function of a jet fuel because you know, no jet fuel demand is, is been crushed. As you mentioned. You know, airlines are talking about their demand being off 90 to 95% flights are down 50%. You know, the number of airplanes flying is down 50%. So if I’m, if I’m a refiner and storage was running out at, at the airports, so if I’m a refiner, I can make check fuel, you know, and what, what do I make? I’m gonna make diesel if I can’t, you know, and um, diesel demand in March and April, it was pretty good because, you know, everybody was, there was still, people were stocking up on everything.
They were panicking and in the, um, you know, in as, as we all went into, um, quarantine, you know, everybody was panicking buying toilet paper. So how do we get that to the stores? Will trucks, trucks, diesel trucks, moving. Diesel demand was great. And the crackers are great. Yep. Great. Yeah. Farmers, they weren’t great, but they were better than gasoline cause no one was driving. Right. So here’s an amazing, here’s an amazing thing. Even though crude runs, we’re down 3 million barrels a day. Last month from year ago, we were making more diesel than we did last year. Wow. Yeah. I mean just, just that. Just an unbelievable, wow. So you know, refiners, we’re cranking out, we’re cranking out these at the expense of gasoline. That’s expensive. Gasoline, jet fuel mostly. And guess, well yeah, the gasoline yields were, were low as well. So yeah, we made too much diesel, diesel stocks built and gasoline stocks have been drawing as, as gasoline has come back and you know, the, the um, he gas spread, so completely went, went the other way. Now is that going to continue this week? Diesel production was down and gasoline production was up. So, you know what we’ll see. We’ll see. Right. We’ll see. But until I think until jet fuel, yeah. I think we’re, fires are still going to be making more diesel than they need, you know, until Chad really, until people start flying.
Yeah. Which a, you know, I hate to say hate to use that term new normal because you know, I never, I never think of a time when it was ever normal. You know, there was never an old normal, but I think you’re right. I think that, I think that uh, people are, people are going to be much quicker to get in their cars and go on vacation than they will on a plane. Um, at least for this year.
Yeah. I think you’re right. I think it’s going to take a long time for jet fuel to get back to a, get back to whatever normal. You know, I think a lot of, I think what we’re going to see is the 2019 is going to become a baseline year and you know, we’ll be comparing a lot to 2019 you know, in terms of both, you know, definitely in terms of demand, you know, it was a record demand here. So I think it’ll be, yeah, that’s a year we’re going to be looking at going forward. Right.
And, and, um, the, the EIA has a stocks starting to decline pretty soon, right? I think, did you mention that already?
Well, the crude stocks they have building. Yeah. Maybe in July and August, you know, mostly in August, I think it was July and August, they’ll start drawing from a very high level, at least according to the, uh, at least according to the EIA.
Right. And then, so we, so we start sort of, uh, drawing stocks and then the price. We’ve already had a pretty good price rally from, from listen six, $6. And that was, yeah, again, it’s all coming off a low levels, but, um, you know, do you see the market continuing to rally through these next couple of months or do you see it, what w what are you, where do you see going forward? Let’s talk about crude oil.
I, I, I really think that, uh, it’s gonna be difficult to, I mean, could we move up another two or $3? Yeah. Can, can WTI get up to 30 or even, you know, low thirties. Yeah. I, I think that that’s possible that, but then you’re risking, you know, then you’re risking return to, or a term by us producers to the market. You know, those that have break even in the, you know, mid twenties may be very sorely tempted to start increasing production. You know, if we had, if we had significantly, you know, even it’s a low thirties, uh, we’re not there yet. So I, you know, that’s, I think that’s a worry and another worry certainly is, um, you know, any, any kind of second wave on this, uh, on this wires, um, could, could really be, uh, could really be crushing. So, you know, I think the is corrected.
I think it’s right to have corrected, but you know what, I think we still CIM, I still think we have a long way to go to, you know, get back into, you know, 40 to 40 to 50 or 50 to 60, that that’s going to be, you know, a long way. Yeah. It’s still seeing that we talked about this a, I think in the last podcast that it’s, you know, you, you, you almost would rather hear a, what a Fowchee has to say to tell you what’s going to happen with the spreads and outright market than the typical oil stuff we listened to. No, I mean it’s, it’s all about this getting this virus, uh, getting the numbers down and I’m getting people even, it depends on how it unfolds burn. Um, you know, a lot of people aren’t going to come out like they used to unless there’s a vaccine.
And, you know, even even the flu vaccines we have now are only 50% effective. So, you know, it has to be something really amazing to, to get us back to where we were quickly. And so, yeah, I guess people talk about a V-shaped or a or a U shape recovery. We have a U shaped and then there’s a chance this market, uh, you know, retraces a little bit even from, from these levels back down, maybe below 20. No, it’s not. Yeah, I mean it’s certainly not out of the, not out of the realm that, I mean we could see a very weak expert, um, in, in June that wouldn’t, you know, that wouldn’t surprise me in the least. I think we’ve, we’ve talked about, yeah, one of June, July has had a huge rally and you know, one of the things that has contributed to that I think is that some of these small, you know, some of these funds not smaller, we’re big, you know, like us soil is in the June.
So you don’t have that, you don’t have that cell or in the on June, July that the, um, you know, the buyers could always rely on, you know, the people off the roll the other way. That’s interesting because that liquidity is out of there. I heard some of the press reports about, um, you know, us oil involved in the F minus $40 oil and I is that they were gone. They weren’t in may, but they were in June and then they were in June and the next day they rolled about 50,000 contracts. And that that was, you know, I wouldn’t you gotta give them a little, uh, I dunno if not the major cause, but they were a cause of that price going down. Oh no question. Six bucks. And then they rolled to like, you know, then they rolled to June 21. Right. So what’s happened?
June 21 has gone nowhere in this rally. Yeah. The actions in the front. Yeah. It’s a, it’s a really a strange product. And when you, when you say, I have people say, how do you, I want, I want to play the uh, an increase in price. Should I buy that U S oil fund then? And you know, you and I, and many of our friends, most of our friends that are in this business, they just don’t look at the flat price. They look at what, what the curve looks like. So you, you, you might have a low front price, but you know, to, to by December it may cost you five, $6 to roll. And unfortunately, the sort of the benchmark for this thing is always the front month price. Right. So if you, if you stay unchanged from now to December, and let’s say that December you’re at 21 bucks and you got in when it was front month was at 16, say, I’m just making these numbers up, you expect that that fund made five bucks when really it might have lost money.
Right, because you’ve been doing a roll. You rolled up to that 21. Right? It wasn’t, so now it’s, now it’s kind of like buying a what a a swap and longterm swabbing. Maybe that’s a better way to do it, but I think they have to kind of, somebody has to show retail investors that when they buy this thing, w what’s, what’s the benchmark that they’re using? It’s not the front price. It’s, you know, a whole bunch of prices on this curve. And, um, I think that’s, it’s, I, I’ve never liked like that thing from the get go just because of the, it’s like an illusion, you know? Yeah. Well, it’s been a loop. You know, it’s, it’s, it hasn’t, uh, satisfied at skulls, let’s put it that way. Yeah. Yeah. I got somebody, somebody wrote in about it being, if it was a hedge fund, it was down something like 80, 85% since inception.
It would be a, there’ll be no money going into it, but you know, it’s still right. It’s still attracts, detracts a lot of money and they’re not only retail, you get, you know, you get a lot of pension funds and a large, uh, money man, uh, people with lots of money putting, right. And then you have people who are trying to are, but on the short side, people who are being against WTI or just going short. Yeah, yeah. Well now they’ve been winners. So I’ve been shorting it consistently. We’re probably dumb. I’m pretty well, yeah. So I’m just like, just a couple of things. The, the option volume has kind of declined and, and you know, we, if we, you know, use a black Shoals, a vol July is still at 93%. So that’s a, that’s a huge number. And, um, you know, a bid offer spreads are wide, but it’s, it’s, uh, we’re just, we’re struggling to get over a hundred thousand lots of day in this market.
So it’s kind of, you know, it’s, it’s been a non entity. And even on those, uh, two days where we had the big declines, you know, one, you couldn’t get volume over 300,000. And, um, part of that’s because the front month had already gone. You know, it was already gone by and people were more focused on, you know, the expiration of the futures contract and they were the options. But we saw once, once the, uh, no Tuesday traded down to six, not only the price movement, but also as I mentioned, the possibility was in put owners and put, if you were short puts and realized you put the position on before we had negative prices and now we have negative prices you want to get, you’re pretty much going to get out of that thing. And it’s, the whole game changed. So we saw a lot of, a lot of puts trade and uh, like on Tuesday we saw open interest in the calls increased by 30,000 and open interest and puts declined by 10,000, which was kind of telling.
So my point is it looked like we were, you know, like a classic bottom. We had a, you know, people getting out of puts and getting into cost type of thing. And we’ve seen that kind of trading going on, not, not primarily, mostly over the last week. So, so, uh, on low volume. So it’s kind of, um, like if you didn’t know the fundamentals and you were just looking at paper flow and volumes and stuff like that, you’d say this kind of had a little bullish flavor to it. And, um, sure enough the market’s going up. And, um, I’ve probably posted these things in our, in our blog and sometimes on LinkedIn, so you can, uh, if you ever get a chance to check out or check out our blog. What else, Andy? That, what do we miss?
Well, I think we need, let’s just talk a little bit about the global balances. We’ve been talked about, we’ve talked a lot about, you know, us crashing balances us Cushing and gasoline and diesel, but globally, again, April was a, was a catastrophe on every, on every level because OPEC production, OPEC and Nanopore production and demand, you know, absolutely drop dead. Uh, in fact, in this OPEC report, sir, they had the, uh, call on OPEC crude. It’s like 16 million barrels a day in the, in the, um, you know, in the second quarter. So you know, that that would, that would mean inventories were building by 12, 12 million or something like that. Um, you know, we’ve been, I’ve been doing, I’ve been doing my own balances because the, these numbers are, are so unbelievable and um, you know what, what I see anyway is, uh, a second quarter bill that I think was close to 13 million barrels a day, if that’s even possible. But that’s what it looks like.
However, I think as we head July and August, we’re going to start drawing global stocks because OPEC is going to, OPEC production cuts are, they’re significant. I mean in April, OPEC produced like 30.3 million barrels a day and I think in may and June they’re going to be down or like 23 and a half, 24 million barrels a day. So, you know, there are definitely some big cuts coming out of OPEC and there are big cuts coming out of, uh, out of non-OPEC, uh, you know, between them I think it’s going to be something like 11, 12, 13 million barrels a day. Again, it’s hard with, I hate being off by a million barrels a day, Jim, listen what we’re dealing with, these are fluid numbers. These are very fluid lowers, particularly on the demand side, cause you just don’t know. But third quarter and fourth quarter demand should continue to increase from the low in April, you know, from second quarter.
And um, yeah, I, I think we’re going to draw, um, something like two to 3 million barrels a day average in the, in the second half. But that’s relative to a 9 million barrel a day build in the first half. So I think we’ll get through June. You know, we’ll build a little bit July, I think there’ll be flattish and then, you know, then I think August the second half we’ll see. We’ll start drawing. Um, again from a pretty high level and you know, on the demand side we’re not who, you know, can’t be sure, right. If there’s a second wave, uh, you know, we don’t know, you know, globally, we all know we’re in a recession. Now how do we come out into that? Not, you know, again, not, not sure. Right. But you know, the, the fundamental picture is, is definitely looks improved as we headed into the, as we head into the second half.
But it’s improved from catastrophic. Absolutely. CA April was absolutely catastrophic. Yeah. I mean, there’s another thing in there that um, these are really deep cuts that these OPEC members are making and I guess it’s a, is still a little slow to get get going on. There has been, um, you know, as we start, like you said, as we start drawing, you also have the possibility that a lot of barrels get leaked into the cells. Totally. Totally. Right. So it’s probably some cap on a, on the market and stuff. Oh yeah. Because first of all, Libya is off. I mean, Olivia didn’t really produce and they produce like a hundred thousand barrels a day in April. So I know that there could be a million right there. They’re not even in the quota. The one big surprise and non-OPEC has been Russia, Russia pledged to cut 2 million barrels a day of crude, not condensates for crude. And um, you know what, in the first week in may they did. So that was really, you know, I thought there’s no way, you know, and they’ve been saying this whole time, uh, we can’t cut cause we’re going to damage our fields, blah, blah, blah.
Right. But they did cut and, and that, and as I said earlier, Canada, U S Brazil, Norway. So we’re seeing some significant, we’re seeing some significant cuts more than I thought way more than I thought we’d see. Yeah. It’s hard. It’s hard gain market share when there’s no market.
Exactly. Yeah, that’s exactly right. We need, we need demand. Yeah. April is a bad month. I think even for oysters, right? Isn’t it a bad, I think it is. Yeah, I think it is. You know, one thing that I think these cuts have prevented is the, um, you know, the containment issues, you know, because now with these cuts, you know, we’re not going to get, it’s unlikely we’re going to get to absolute tank tops on everything. And the other thing is there’s going to be, there’s going to be ships around, you know, so floating storage, which doesn’t pay now anyway, you know, if you look at the contango is, but you know, so you can still put stuff on ships if you had to, but we’re not, we’re not going to get to the absolute containment. And that’s, I guess that’s good. That’s good.
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Maybe, maybe. Well, I know that tomorrow things will look a lot different than what we’re talking about today. So we will continue to track this. And you know, like I said, I talked to you pretty much every day and I try to post things on our blog every day. And it’s usually an interesting article that we’re talking about and I’ll post it, or sometimes it’s my own stuff on, on the crazy world of options. And you know, it might be worth checking it out every now and then. And so let’s, let’s stop it there, Andy, and we’ll pick this up in another month.
Okay. And you can find that blog on www.commodityresearchgroup.com and if you have any questions, reach out, feel free to reach out to me. A Lebow at Commodity Research Group.com. That’s A L E B O W at www.commodityresearchgroup.com. And also
look for Andy getting quoted in, in virtually every newspaper. And are you doing any interviews these days Andy?
Um, Canadians don’t want you anymore. I was on a couple of months ago. Yeah, I think that, you know, now that my hair’s growing back, I think they’re cutting me.
Alright, very good. Well till next month. Okay.
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