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 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.
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.
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Today is November 12th and I feel like, uh, once again, there’s a lot going on.
Andy, good morning.
Good morning, Jim. There’s a lot going on in this market, yes.
I hate to use that phrase a lot of moving parts, but, um, let’s, let’s start with demand. We had the, we had the big three oil market reports, monthly oil micro reports from the international energy agency, the U S Z I a and also OPEC. And they all, uh, downgraded or revised downward their demand, especially for the fourth quarter. And, um, maybe you can kind of summarize, uh, what they did and what you think.
Well, first of all, I have to say, it’s, it’s really no surprise to us here at, uh, commodity research group at CRG, because I think we’ve been saying almost every single podcast that these demand estimates were much too high and that we would not be surprised to see them revise downward. And, uh, in the, the, the three of them, a revised demand downward, as, as you said, Jim, mostly in the fourth quarter, uh, there was a, about a million barrel a day revision for both OPEC and, uh, and the, uh, I think the IAA was, uh, downward by 1.2. Most of that revision, the IEA says is as a result of the lockdowns in, in Western Europe or, or in Europe, as well as the, uh, mild start to, um, the Northern hemisphere winter. And again, you, you look at, uh, what’s happening with, with the lockdowns.
It directly affects, uh, transport demand. We’ve been talking about this since, uh, since February or March and, uh, you know, our number, uh, w w was one that we thought the lockdown in Western Europe, what was going to lead a decline of about a million barrels a day. So we were pretty close to, uh, to where the, uh, where the IAA was. And they also revised downward into going into a first quarter, uh, again, concerned about the potential for lockdowns, not only in Western Europe, but, uh, but elsewhere. So, um, yeah, I, I think that their numbers were way too high even to begin with. So, uh, that that’s not a big surprise at that they revised, uh, demand downward. And certainly, you know, there continues to be a lot of uncertainty on, uh, on where we’re going, uh, with demand a lot, having to do with the, where the, where the virus goes, obviously, and, and what the government reactions are going to be to the, uh, to the virus, as well as the progress of the vaccine. It should be noted that that while demand was revised downward, um, globally, there are, there are some pretty bright spot spots. Jim, namely China and India, uh, are, are showing some pretty good growth India finally showing that, you know, it’s, um, uh, year on year growth, uh, so that that’s, you know, that that’s certainly an underlying bullish factor. Uh, but it’s, it’s nowhere near enough to, um, it’s nowhere near enough to make up for the losses and, uh, you know, in OEC D demand.
Well, it’s interesting. Um, after looking at all three of those reports, you kinda get a little bearish feeling inside and you look at the market and it’s going up with what’s going on there.
That is, uh, what’s always great about, about commodity markets for the few looked at all the debt. There’s been a lot of data that’s come out in just the last, uh, in the last, this week. Um, certainly beginning Monday with the, with the great news about the, uh, Pfizer about the progress of the vaccine. But, uh, you look at all the data that that’s come out. And to me, most of it was, was bearish. You know, that there was real, there would be, uh, no reason just looking at the data, uh, to think that the market was really going to, to improve all that all that much. However, yeah, we’re, we’re not the only ones looking at this state of, because, uh, obviously, uh, OPEC and, uh, their, um, PR producer allies, namely the Russians, uh, are, yeah, they’re also looking at this data and, you know, if they start to, and they are going to take a very serious look at all the balances, uh, you know, that their meeting is, uh, November 30th and December one.
And, um, you know, th they’re going to look at these balances and say, you know, we’re supposed to increase production by, uh, 2 million barrels a day for the first quarter, uh, 2021. We’re looking at some of these demand estimates and some of, some of the calls for OPEC crude and some of the calls for non OPEC crude. Yeah. They’ve gotta be thinking that that would not be a wise choice at this point. And I think the market is beginning to, and they’re putting out those trial balloons, like, Hey, we, we might not increase production that, like we said, we would, in fact that they’re even talking about maybe even reducing production for the, for the first quarter, we’ll see how that goes. But yeah. So I think that really removes a real bearish factor for this market, because 2 million a day, right. 2 million a day, right. They increased 2 million a day in August and know in reality they never, they never really got much of a bang for that. You know, th th that didn’t really, you know, the price price didn’t go that, that they really would have. I think they were expecting the prices would be, uh, even would be a little bit higher because remember they’re trying to match their output to demand. And because the demand has been consistently lower than what they had thought when they went out and they met a couple of months ago, you know, it’s kept the, the market is as much full all. I think what their, their expectations had been. So, you know, I, I don’t think they’re going to be anxious after really not gaining all that much by increasing production. I mean, obviously they’re gaining revenue, uh, but you know, at about the same price or even lower, I mean, let, let’s not forget that last, you know, just last week or seven or eight sessions ago, WTI was down around 34 bucks below $34.
Right. So, you know, it hasn’t really been a great, it hasn’t been what OPEC plus had really wanted, you know, for this quarter. And, uh, I’m, I’m pretty certain that, uh, they’re, they’re going to be taking a hard look at increasing production for next quarter and decide not to. And I think the market’s there too. I think the markets, I think the market’s there too, and that’s, that’s part of this, this rally that you’re really removing a, what would be an overwhelmingly bearish factor for this market, if, if production was to go up by 2 million barrels a day.
Yeah. You know, it’s interesting a few months ago or when this, uh, uh, pandemic was beginning, um, I think you talked about how difficult it was to get a handle on demand. And, you know, we would see revisions by millions of barrels and, you know, now it’s maybe hundreds of thousands of barrels, but still, I think the, um, EIA suggested that they might be overestimating demand. I think they actually said their risk to their numbers is probably on the downside. So yeah, it’s hard to believe OPEC would, well, I mean, they did it earlier this year, but that was more of a, uh, that was more of the Saudis, you know, flexing their muscles. But, um, so basically, I don’t know if you want to put a probability percentage on it, but you, you think the way the situation is right now going into this November 30 meeting, that these guys are not going to put 2 million barrels on the market. And is there a positive probability that they might take barrels off or what, well, what, what’s your feeling on that?
Yeah, first of all, when, when they’re sitting at these meetings, looking at the market, what’s the number, what’s the number one decision factor is where is the price today, right? What’s the price today? So, you know, if the market is Brent is closer to 50, you know, or even above 50, which I, I don’t know. I don’t, I don’t really see that, but, you know, if the higher the price, I guess, the more the potential for them to, uh, crease that their output. But I, I really believe that the profitability, uh, I would say there’s a two thirds probability that they won’t increase, maybe even higher than that decreasing again, that may, that’s going to depend on the price. If the markets really take it on the chin and two weeks. Yeah. They may look at decreasing decreasing production, increasing it again. I think that, I think Brent’s really going to have to be flying for them to, uh, you know, for them to be increasing production for the, for the first foreigner.
It’s interesting that you say that these, uh, OPEC guys are looking at their screens because we, we remember the day when, um, in, in one OPEC meeting, when a minister said those numbers on your screen are wrong. The men, when they, uh, future start just started, right. It was like, I think it was 1986, something like that. Anyway. So we talk about OPEC. Libya has been in the news, are they actually producing a million barrels a day right now? Oh, that’s what they say. That’s what they say.
That’s what they say. Uh, although they did put a caveat, the, um, the, you know, they may not be able to sustain a million barrels a day, but I think even a million, even getting to a million this quickly is, uh, you know, it’s a tremendous job by them. Uh, most analysts, including myself thought there was no chance that they’d get to a million and in 2020, you know, we’ll, we’ll, again, we’ll see if it’s sustainable. They’re talking about trying to get up to one, three, or maybe
Yeah. I was going to say, yeah, yeah. I mean, if, if, if, if 1 million this quickly so surprising, maybe they can get to one, three, and then we’ll have to see how long. Yeah.
Yeah. And that’s another thing that’s, um, undone, you know, on, on OPEC is that, uh, that is that Libby has been able to increase production. Of course they are not part of the, uh, OPEC plus agreement. So we’ll see, we’ll also see how long, you know, until they, until they’re brought in to the, to the agreement. But, uh, I think Libby was talking about, well, maybe by, you know, maybe by 20, 22, you know, we’ll, we’ll look at it. Uh, but, but, you know, that’s been a factor, uh, Iraq too, um, has increased production. Although today there were some news items about, uh, Iraqi production being actually being lower for, uh, for November. We’ll see, because they’re under pressure, you know, that they’re, they’ve had trouble, uh, getting Curtis Stan into, into, uh, into the, into cooperating with the, with the, um, with the government. So those are two, those are two actors that clearly want to see the output, you know, see in increase output. We’ll see, we’ll see where Iraq, you know, w what, what the Iraqi numbers ended up being.
So, um, so far you mentioned China and India demand is picking up over there, but, but Europe’s going into lockdown and demand will probably come down. What’s that do for the flow of say products and oil in general?
Well, I think we’re going to start seeing, uh, products moving ever, ever westward, because we’ll see, you know, there’s going to be, uh, there’s going to be increased exports out of China because the, um, all their export commitments are the quotas having haven’t been met. And, uh, inevitably, uh, I think the marginal barrel is going to start moving, uh, ever westward, particularly, you know, Europe is, is diesel is, could be real. It could be problematic. Um, because as we know there, um, you know, diesel powers, a lot of the, a lot of the cars, uh, unlike in the us. So, um, I think we’ll probably start seeing these. We already saw, uh, pretty high diesel exports into the us for the, the last, not this week, but the prior two weeks there, they were like off the charts. And I think we’ll probably start seeing that, particularly since the Hogo, um, the spread between heating oil and gas oil is, is pretty high. Uh, so, you know, you can, you can make it work. So I think we’re going to start seeing some of that excess, uh, just, just keep moving West.
So, um, let’s, let’s talk about the U S U S is the COVID cases are starting to increase exponentially. And, um, it’s kind of in disarray as, as far as a federal policy, but each, each state has it. I know in New York they’re doing sort of a mild lockdown, not like it was earlier in the year. We seem to know more about the pandemic than we did back then. What’s, what’s your feeling for, like, let’s, let’s talk about product demand in the U S and then we’ll talk about, um, oil production.
Well, uh, uh, demand has certainly, um, improved dramatically over the last, you know, since the, since the lows, right. You know, which is not, which is not saying all that much. I mean, the low of, uh, us total product demand in April was like 14.7 million barrels a day. Uh, and right now it’s running around 19 million barrels a day, you know, so we’ve certainly seen some improvement, uh, across the, across the board, but it’s nowhere near what it should, you know, it’s nowhere near like the, like the last five-year averages. You look, you look at, um, you know, you look at total total demand and it’s, you know, let’s say it’s running at 19 19 million and the five-year averages are 20 and a half to two 21. So, you know, we’re not really, we’re improving, but we’re not, you know, we’re not close to close to normal.
Um, DIA is a little more optimistic than I am on demand, which is not surprising. Um, you know, I, I think if we look at diesel demand has been pretty good improving, you know, there’s still good demand for goods. Uh, October was, uh, was a good month because of the harvest on November, what we’ll see. And the November, December, January, we’re going to start getting into, you know, we’ll start getting into weather for a diesel. Diesel’s probably, you know, of the, of the major transport demands, the best gasoline’s challenged because of the unemployment, you know, we need, we need jobs, we need people to be going to their jobs and, you know, the employment picture is improving, but, you know, we’re still, we still have millions unemployed, uh,
Right. I do. I do see, um, we had to, we, we had to bounce back and GDP was that in the second quarter, third quarter, second quarter. And, and, um, we’re, we’re looking for, sorry, what, what was the plus 30? That was third quarter. And they’re looking at the consensus estimate is we’re going to grow another three and a half percent or so, right this quarter. So underneath all this, it’s, it’s still really bad, but we seem to be moving upward.
So we’re moving upward slowly, slowly, but that’s supplies still,
Still are swamping demand. But what I’m trying to, I guess, what I’m trying to get a handle on are, are the suppliers in terms of a refining capacity and oil production, uh, adjusting enough to balance this market, given that our demand is still below last year, but moving upward,
The answer to that question is yes. Yeah. I think the answer is yes, because total, total supplies, you know, they’ve drawn from the, from the highs we, we were at like a 1.4, 5 billion barrels, and now we’re down, uh, uh, you know, 1.3 what’s what was the last one, 1.36. So, you know, we’ve drawn slowly and refinery capacity is, I mean, re runs away down and us domestic production is down a lot from the highs. So they have adjusted, but, you know, it was such a shock the second quarter that, you know, we, we, we still haven’t gotten anywhere near, you know, we’re not, we’re just not close to normal. It’s going to take, you know, it may take according to the EIA, if you look at day supply, you know, normal day supply, which is total stocks divided by demand, it’s like, you know, 60, 61 62 days, let’s say, uh, according to the EIA, I’m looking at this for, uh, 20, 21. We’re not, we’re not getting there. We’re going to be in the mid, mid sixties all year, next year, which isn’t, you know, which is better than where we were earlier, which was in the nineties. This is what I’m trying to say in April the day supply, or there’s 95 days, Jim. Okay. Sweetly off the chart. One of the, you know, just the massive supply shock. Yup. And of course there was a price shock too.
So let me ask you this, let me ask in a different way, uh, think about something like a 50, $60 call spread. So you let’s say you buy the $50 call, sell the $60 call and I’m giving you any, any month next year, that, that thing goes in the money. So do you see prices going above $50 potentially? I’m not saying that’s your call, but any month of all of all next year or just the first half of next year,
Let’s talk first half, first of all, what do you think? That’s it basically, would you rather buy that or sell that in the first half of the year?
Do I think I do. I think prices have a shot to get over over 50. Well, there’s always, there’s always a shot. We always have a shot that’s for sure. Now I likely likelihood. Yeah. I mean, there’s always a shot that it, that it gets over 50 LA, a lot of good things have to happen. And, um, I guess I’d rather be a seller that call spread than a, than a buyer, Jim, you know, I think the market is really still gonna, you know, even with, even with, even with the vaccine, you know, the market’s still gonna, it’s still gonna struggle.
You know what, what’s the key thing and let’s get back to, let’s get back to OPEC and OPEC. Plus if Mar if the price is rally really sharply, you know, it’s, we hit in the second or third quarter, they’re not sitting on their hands. No, you know, they’re, they’re, they’re way, they’re, you know, they’re anxious to increase production. There’s a lot of pressure on that group. I mean, the Russians are, uh, you know, they they’ve been they’ve, they’ve said, you know, many times they want to increase production. I don’t think they’re going to right now, but, you know, they have, there’s a lot of spare capacity within OPEC. Right.
So a lot of overhang, there’s a lot, there’s a lot of overhead in stocks. And then also behind that there’s overhanging excess capacity, right. Yeah. Right.
And, uh, you know, as I said, you have a lot of producers that are, you know, anxious to the Persian Gulf producers. Um, Libya is not in the agreement, but, you know,
Yeah. I, I was going to say that we get this great news about a potential vaccine coming in. And, um, it’s the question of when, so we, we, you know, we talked about this, when you, when you’re trading futures contracts, the December futures goes off November. In fact, the December option is gone before the OPEC meeting happens. So, you know, if you thinking about, okay, we’ve got this vaccine, that’s great news. When does it become effective in terms of oil demand? Is it, it’s probably, I think the IEA even pointed that out. It’s not going to happen till late 20, 21. Right? Right. So it’s terrific news. And, but from a, from an equity standpoint, if you’re, so if you’re buying, you know, if you’re, if you’re counting on demand from that vaccine to help you out, it’s not gonna help you out for a while.
But if you buy, let’s say, uh, a basket of oil equities, you know, and they’re going to be still in business by the second half of year, it’s going to help them out. It’s just not going to, you know what I’m saying? I’m trying to do the difference between it’s like when, uh, when our old, our beloved company went bankrupt and the judge came in and froze accounts. I mean, I guess I get a sense of the judge was used to dealing with stock and bond companies as opposed to commodity companies. Cause we had some people that had gas-oil and it was going to delivery in two days. You know, it’s not like owning Apple stock. You can own it for as long as you want to. So is it, so is it, you know, is it the news that affects sort of the, the oil companies that are doing business or are companies that, uh, earnings are affected by changes in, in, uh, energy prices? It’s, it’s different than when you’re actually looking at, you know, the futures and especially the option.
Right. Cause we expire, right. You don’t expire, we expire keep training and the state discount, you know, you discount future earnings and future cashflow. Yep. And you know, certainly one would hope that demand is going to be a lot stronger second half, but you know, we still have to get through the hurdles and the first half, and that, you know, we don’t know if there’s going to be future lockdowns here in the U S I’m sure it’s not going to be like it was in March or April. Right. But you know, it could be, there could be some targeted lockdowns and then, you know, what, how does that affect our psyche? Right. Cause the big problem still is jet fuel. You know, it isn’t like people jumping on or jumping on planes, you know, they’re, they’re not, I mean, there’s definitely been an Asia, this jet fuel consumption and flight data is improving a lot, but us not so much, you know, it’s improving marginally marginally.
And that, and that’s, that’s the big area of concern. Now, the, the thing we haven’t spoken about, Jim, and I know you always like talking about, um, NGLs, polypropylene, either propane, but yeah. You know, that’s really, that’s, you know, the, the mrs. Robinson, right. Few that that’s the good news, is that plastics, plastics, right then that, you know, we’re seeing, I think the numbers for, yeah, we’re seeing some decent numbers and the EIA is expecting decent numbers for ethane, propane, polypropylene, a nap that’s, you know, all the others, you know, other quote, unquote, other, other than the transport and jet fuel, you know, is, is improving. We also see a,
Uh, I ran into a guy who, uh, just one of the, one of the trucks out here that delivers propane tanks. And he said, his business is off the charts. People have been buying these outdoor heaters that are run by, you know, propane tanks. So, you know, I looked at it, it’s probably not enough to move the needle because, you know, if it gets too cold, those things are good. You know, people aren’t gonna, aren’t going to use them because it’s still it’s weight. They don’t put off enough eat in the real cold weather. But right now, I don’t know if it’s, if it’s moving enough to move demand, but, um, you know, you could, you could see, uh, all these weird things the way people are adjusting to. Um,
Right. Well, I think, uh, I think what will move, what will really move the needle on propane is going to be, I’m a call, you know, if it is called particularly called in Asia, because the Chinese, you know, they’ll, they’ll w we’ll see propane demand increases.
Well, the EIA has a really bullish outlook on propane in there. I mean, they’re saying we’re, uh, something like 5% over, uh, stock levels on, based on the five-year average now end of October. And then coming out of March, we’re going to be 16% below. So that’s a, I think that’s a pretty hefty draw, 50, 60% below the five-year average. So that’s on top of the seasonal draw that you get. So that’s a pretty big, uh, swing of, be interesting to see how that pans out. No, no. That’s for natural gas. Gas. Yeah. But they’re expecting, uh, basically using, uh, going back to more normal winter.
Well, yeah, I mean, and, and that’ll certainly help overall, they’re getting back to petroleum, you know, certainly help overall petroleum demand. If we can get, you know, the weekend, a normal winter called it, a normal winter would be, you know, that’s probably worth three to 400,000 barrels a day right there.
Right. Right. Um, I just noticed in the EIA monthly, and I put this on our blog and I actually posted it on LinkedIn as well, but the EIA mentions the put call ratio of, of, uh, gasoline options. And it was it they’re saying that there’s a, uh, uh, way more puts trading than calls relatively speaking. And, um, there’s actually some puts, uh, that were, um, trading in April gasoline of next year. So that’s, and that hasn’t happened. So I guess they’re, they’re saying it’s traders are, uh, they always talk about the buy side of these things is also, you have to remember that if anybody’s buying these, put somebody selling them, but anyway, they’re, they’re suggesting that people are taking buying protection against, uh, gasoline, uh, uh, collapsing over the next, uh, next period or going forward.
Yeah, that’s a problem that might not be a gasoline is worrisome to me because if we do start increasing, we’re going to start increasing runs. I mean, runs have been down a one to balance. You had a balance market, but turnarounds and hurricane damage, you know, kept, runs probably lower than they ought to be. And they are going to increase. And, you know, gasoline demand is, is, comes in soft. You know, this, this winter, you know, we could, we, we could be in trouble on gasoline so I can see it makes sense. It’s rational.
It’s just, uh, you know, I’ve never seen them. I mean, they used, they talk about options sometimes, but not very much. And, um, the other thing is I had forgotten, almost forgotten. These things are traded
Much. It’s very, very liquid, but, you know, they, they, they had a heyday way back when, and I don’t know, maybe 2001 or something, but, um, yeah, I haven’t seen them. I don’t, I don’t even follow them. So that was, that was like an eye-opener
That might’ve been around our heyday too. Yeah.
Right. Right. Well, speaking of a time decay, I was just looked at the op options have been interesting, you know, they, they got really quiet for a while and now they’re back, you know, the trading over a hundred thousand a day, I think on some of these down days are over 200, like, uh, was it November 2nd? We had that reversal day and we, uh, we saw Val get up to like 63 and a half based on the second nearby. It’s around 45.5 now. So, um, it’s, it’s still quite high. I mean, that’s, that’s, uh, that’s uh, think about the long-term average is around 30, so we’re, we’re still high in and all the things that, you know, you’ve been talking about today, that makes sense to me. I mean, this w you know, we’re going, you’re going into a lockdowns, uh, OPEC is deciding on what they’re going to do. So we go into this, uh, November 30th meeting and they do decide not to put the 2 million barrels and that’s, that’s the decision I’m gonna wait and see, they rolled over going into the, so the volatility tends to blow out on down moves and come in on up moves. Is that enough to sort of balance the market in the first quarter? Or is it we still do if they don’t increase, if they, yeah. If they don’t increase. Yes. They don’t increase.
Yeah. I mean, what we’ll we’ll see it should, it looks like there’s still going to be a stock draw. We’re having a modest thought. There was a modest stock. It looks like in fourth quarter, I think I had like one and a half million and the other one, the EIA in IEA or in the 2 million, but first quarter, it looks like the call on OPEC. Crude is 26 and a half million barrels a day. They’re producing 25 now. So we’ll, we’ll keep drawing stocks slowly, but you know, that, that’s a good thing. Right. You know, if we mentioned this, if they increased production, then there’s no chance of the stock draw. And you know, that, that I think would be, that would be negative. Right. They don’t increase, you know, I think the market’s discounting and, you know, just like a rollover right now. So I don’t know how much more it’s going to rally after the meeting. Right. It’s if they roll over and if they, if they cut, obviously that’s going to be bullish.
Yes. It’s going to be interesting to see how that plays out, because you know, you just, what kind of information are going to have from now until they meet different than what the, I mean, what’s, what’s going to change basically from now until then. I mean, obviously the whole world could change,
Right? The whole world could change. What am I saying? What am I saying changed from last Monday to now, maybe there’ll be more. Maybe there’ll be better vaccines. I don’t know the main change that’s going to be where the prices
Before we leave the, uh, options, the, uh, the spread options. I was just looking at open interest in it. It’s not too interesting, but, um, I think these trades might’ve been put on a while ago, but, uh, jeans who June strips the 20, 20 year 2021 Jan through June a one month spreads strip, plus 25 calls have about 4,000 open interest. And so I was just, that’s the first half of the year, obviously, but w what do you think about that trade going in the money? I’m not talking about what it’s priced at. I’m just wondering if you think there’s a chance that thing goes into money.
Well, Jeff, I think as you and I have said many times, anything is possible, anything is possible, right. And if I was to say all of this, no way, you know, that, that, that the market could go backward data. We know what would happen.
Well, if you said that I would go out and buy a bunch of,
I would do that all the time. Right? That’s the trait of all times, no, somebody said, there’s no way it could happen. That means that not only is there a way, but you know, probably will happen.
One of my favorite conversations was, um, had a, uh, guy on the phone and selling a bunch of, out of the money calls. And he said something like, you know, I don’t know where crude’s going, but I know where it’s not going. And so he’s, so he’s selling a bunch of these calls and I hung up the phone. I wanted to call my grandmother and have her go buy these things. It’s like, I was waiting certain for this oil market. You know what happened? You have to tell me
Exactly what happened like right away. Yep.
Oh, you’re done selling, yes. Markets are like that. They know that
They know how to punish you. They really know how to, but getting back to your question about backwardation. Yeah, no, certainly it is possible. And I think the way that could happen, obviously if demand improves and margins get better, uh, you know, and, and runs are, are slated to increase, but on the domestic production side, you know, there, there are some people who believed that, uh, us production next year is really going to be declining at a, at a pretty rapid rate because of the depletion of, um, you know, th the depletion rates and the rising costs, you know, and think that production, which, you know, it was down because of these hurricanes, the, the IAA, has it going from the EIA, has it going from like, you know, currently it’s, I think it’s like 10, five, and they have it going up to 11, one 11 to, and pretty much flat towing around 11 million barrels a day. You know, there are some people who believe they’re, they’re on their way down to 10.6 million barrels a day next year. And, uh, you know, if they’re right. Yeah. There’s, there’s a chance that, that these spreads could go, could go. Backwardated definitely a chance that it could go backward data.
Yeah. It’s, uh, it’s, uh, I’m thinking the second half of the year more likely, but, uh, yeah. Once, once this vaccine kicks it, listen, it’s, it’s, we’re still a long way away, but let’s say, it’s, we get more positive news and we get it out there and you start to see the vaccine having an effect. I mean, you might see a surge in demand. It might be overwhelming demand, surge, and, uh, and, and like to fly and to, to travel more.
Definitely. I mean, you know, I think this is gonna, yeah, there’s gotta be tremendous pent up demand. Um, you know, I’m, I’m sure you and I, and everyone who’s listening to this podcast is antsy to get, to get out, to get, to get going. But, um, you know, it looks like we still have, we still have to wait.
Yes. Um, do you want to say anything about the election? Is anybody in the Biden camp study in, uh, granted Vicksburg yet, or,
Let’s talk about oil prices. What was the need for oil poles?
Well, we’ll do it quickly because we’re getting to the, uh, to the end. Yeah. We’re getting near the end of our time, but I think in the near term, it’s not going to have, I don’t see a change of administration having all that much of an effect. Uh, certainly there’s going to be a, certainly there, there’s going to be a move towards green, you know, there’ll be more investment and more policy towards the greening of, uh, energy, but that was underway anyway, you know, the market was moving, a market was moving in anyway. Um, so I think that’ll be, you know, I don’t know how long that’s going to take really on, on energy
Had a major headwind, but still moving forward. And maybe now we have, it’ll have a tailwind, right.
It’ll have a tailwind. Uh, president elect Biden has, has, had said that he is, uh, not against fracking. He is against drilling, you know, he’s, he’s looking at, uh, drilling on FA you know, future drilling on federal lands and in anticipation of that, a lot of domestic producers just bought, you know, just stockpiled permits. So, um, those permits, I think if I’m not, if I’m correct, they’re good for a couple of years, maybe, maybe longer. So that, that, you know, I don’t think that’s going to have a major impact on, uh, on production. Uh, and at least in the short term, and politically, obviously the, the big question is where we’re going with Iran and Venezuela and the sanctions. And, um, you know, I’m sure that’s going to play out a lot next year, but there’s those sanctions, uh, from lifting those sanctions to allowing a ran onto the market. Oh, I’m sorry. From, from rejoining the JCPO to Iran actually increasing production, you know, getting more barrels onto the market. That’s a long way to go. Right. You know, that’s a long, long way to go for whatever, you know, if that’s
Yeah. And Venezuela that too, you know, that, that, that’s, that’s a difference, you know, that’s going to take a lot of time and I think as long as Maduro is in office, it may not happen at all.
Right. Right. Um, and finally, do you want to make a, uh, like a price? What do you think about prices going forward? Say the next couple of months.
Yeah. Is there a chance to get up to, uh, to $50 as, as I said? Yeah. I think there’s, uh, you know, there is a chance if, uh, you know, if we were somehow able to Dodge the, uh, the COVID bullet here, here in the U S but I think more likely, you know, I, I, I still like the market and like a 38, $45 range, something, something like that. Um, you know, we’re far from out of the woods, you know, even with this, even with this rally, um, you know, very far from out of the woods and we’re a long way from getting, uh, you know, getting back to normal on, uh, on inventories, on demand, uh, production. So, you know, th there’s a long way to go.
Now, you didn’t blink when we traded down to 34, you still thought that was a good range. If I recall, right. 38, 38.
I thought that, yeah. I mean, I may have maybe there, yeah. May 34. I was a little surprised we got that, that low, but that was on the, I think that was on the lockdowns. Marco was really freaking out at that point.
Does this, uh, was that what was the recent law that we hit? I think it was like 33. Yeah. Right. Something like that. Yeah. So, um, but you’ve been, you’ve had that range for a long time and it’s been pretty. Yeah.
Yeah. It’s been pretty good. It’s been pretty solid, you know, maybe OPEC plus decides to reduce production significantly and, you know, and that’s going to give them Mark and a lot of upside, maybe these, you know, may have maybe the vaccines are distributed, you know, quicker. I, you know, there’s still a lot of uncertainty.
Yeah. I, um, I did a little, uh, class on, um, options and futures, and I gave the students a couple of, uh, price charts and ask them what they thought about the market. And one guy was talking about price. He thought oil would be in a price range. And, and we were talking about strategies that would you, would you sell a strangle or straddle? He said, no way too scared, you know, it’s, I have that range as well, but I just, I can’t come. I can’t, uh, it’s part of my bias from, from, from forever, but I also, uh, think there’s too much going on in here. So
Yeah, there’s too much to go on. That may be the trade to sell those, to sell those strangles foot. It might not be the best if you, you know, if, if you’re, uh, if you want to sleep at night, if you’re an insomniac, it probably doesn’t matter then.
Yeah. So, okay. Thank you, Andy. We’ll we’ll talk again next month. Uh, anything else you want to add?
Yeah, we are going to talk about natural gas next month. We have a special guest and we’re very excited about this guest. Then Jim, we’ve been talking petroleum here for the last few years and I think it’s, uh, you know, I’m really looking forward to talk a little bit about natural gas, but somehow I think we’re going to go, we’ll be talking about petroleum too.
I want to hear all about March, April 9th gas, the widow maker.
Yes. And thank you, Andy Lebow.
Thanks Jim. Talk to you later.