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.
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Short Term Energy Outlook – EIA
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. To learn more about us, you can check out our website, www.commodityresearchgroup.com, where we post our podcasts and our blog. We’d like to thank our friends at EKT Interactive oil and gas training for hosting this podcast, check out their newsletters, podcasts, and learning modules at www.ektinteractive.com. 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. Information is not guaranteed to be accurate. This is not an offer to buy or sell any derivative. Today is September 7th and Andy, let’s get started.
You had last time we talked or I should say we had a podcast, you put out the possibility that the market could actually go lower when there was a lot of, um, very many, uh, bullish scenarios put out there. Why don’t you talk about what you know, and the market has actually come much lower. What’s going on to bring it so low and maybe talk about what you were thinking back then.
Okay, good morning, Jim. Yeah, we, we didn’t share a lot of the views that the market was gonna be unbelievably tight in the third quarter and, uh, heading into early fourth quarter. And basically Jim, it was, you know, we just did our homework really and looked at the, looked at the balances and, you know, they didn’t, they didn’t look that bullish a, a big factor, you know, just looking at third quarter, what we had was actually a surplus, uh, of about a million barrels a day. And then the, you had to add in, you know, up to seven or 800,000 barrels a day of, of SPR supply that that was hitting the market. So, you know, to us, we saw upwards of, you know, 1.5 to 2 million barrels a day surplus for, uh, third quarter, and then looking at the fourth quarter, at least for, uh, October and November.
Uh, our total surplus was, uh, closer to about a million barrels a day. Um, the SPR is gonna resp the big SPR releases from the, the us are gonna stop in, uh, October, uh, end of October. Uh, but nevertheless, you know, looking at what was going on on, uh, you know, both basic supply and demand, uh, it didn’t, you know, to us, we weren’t seeing the shortfall. Uh, and as a result, you know, I think we were, we were by and large, more bearish than, uh, what the rest of the market was, uh, was looking at.
So, um, maybe we can, uh, dig down a little bit and, and start off with, um, uh, demand was underwhelming I, and where, why don’t we start with China? Uh, what can you tell us about, uh, uh, Chinese demand currently and, uh, going forward?
Well, China’s demand is, is coming in soft. Uh, the, the zero COVID policy has, uh, definitely taken away from, uh, where demand is. It’s probably, they’re gonna end up the year at, um, down for the year, at best, at best, they’re gonna be unchanged at best, but I, I think, uh, when the year is over year to year, they’re, they’re gonna be down now what the market was looking for. If you go back to, you know, LA last year’s expectations, you know, the market expectations were for China to grow by up, up to a million barrels a day. And that clearly is, uh, not, not happening. So relative to expectations. That’s a, that’s a big loss in, uh, in demand. The other big consumer that is, uh, not coming through at all is the us, uh, our numbers have been, um, you know, have been coming in soft here in the, in the third quarter for a lot of reasons, chiefly, uh, it’s it’s gasoline demand, um, June was revised upwards and maybe gasoline demand.
And we’ll talk more about that later in the podcast, but, you know, this driving season has been, has been a bust, Jim. So, you know, you’ve got us and China, the two biggest consumers with demand coming in, coming in soft for, uh, again, a variety of reasons. COVID higher interest rate expectations for, uh, an economic slowdown and high prices here in the us, you know, crushed gasoline demand. So, you know, we’ve been marking it, demand down, uh, and we have it for the second half of 2022 right now. We actually have it up by like a pathetic, uh, 200,000 barrels a day. And, uh, I wouldn’t be surprised as we move later in the year, you know, that, that CRG revises that downwards by, you know, it, it comes in unchanged to below last year, last year’s levels.
And, um, on the supply side, we just had recent news, uh, OPEC plus, um, a reduced production by a hundred thousand barrels. What, what’s the implication of that?
Well, that, that has virtually no implication. I think that was, uh, more symbolic than, than anything else. They just, they just put out 20 last month in August, they put out 29.6 million barrels a day, which was the most since, uh, you know, they were really cranking it out during the price war of, uh, April, 2020 and, and, you know, OPEC production since the fourth quarter of, uh, 2021, uh, is up, you know, it’s up almost 2 million barrels a day. So, you know, they they’ve been increasing, they’ve been increasing production, you know, drumbeat increase every, every month. And, uh, the, this last decrease, you know, I, I don’t think a hundred thousand barrels a day is, is, as I said, is symbolic. Uh, the big thing with OPEC is that, you know, the reason they were able to crank up production, the 29.6 million barrels a day is Libya Libya’s production.
Last quarter was down to 0.6 million barrels per day, as they had, you know, continuing conflict, which has been going on for years and years now, continuing conflict between, uh, the Eastern governments and the Western governments, which, um, has from time to time, uh, impacted their production dramatically. Well, they, they came to a, to a quote unquote truce, uh, which would enable production to, uh, increase in, uh, and last month they were up by point 0.5, 500,000 barrels a day. That’s a huge number. It is, uh, particularly for Europe, you know, that, that all, that all the, all those barrels are going right to Europe. I mean, Italy, Italy is a, you know, big consumer for, uh, Libya. Uh, so I, I should say all those barrels, but a majority of those spirals are gone going right to Italy. So, you know, that’s a, that’s a, that’s a big number, uh, and yet another bearish factor for the, uh, you know, for the market.
So yet didn’t talk about, uh, diesel demand when we were talking them. I mean, that’s a, what’s going on with, was that affected by high prices as like gasoline? Is it, uh, being affected by the economy what’s going on there
Start? No, it’s, it’s pretty interesting. Jim, the diesel demand, I guess, is, is, uh, it’s been steady better, you know, it’s, it’s coming in lower than expectations, but it, it ha it’s not terrible. I mean, it’s actually pretty good. At least us diesel demand, uh, European diesel demand, uh, is OB is, is slacker. I’m a slacker. Well, us, the European diesel demand is softer. I, I should say, yeah, but we’ve been hanging in at like 3.7 to 3.8 billion barrels a day. And I, I would’ve thought it would be, you know, much lower than that. And perhaps in the fourth quarter as we, uh, you know, if things do slow up, uh, we’ll start seeing diesel demand, diesel demand soften, cuz that that’s basically most affected by, um, economic conditions. So I, I would expect that we’ll start seeing diesel demand a little bit softer, but I I’d say that’s been a big, that’s big, a big plus. And, and what’s really been a big plus for diesel. Uh, at least for us diesel has been an export demand. Um, there ha there has been good export demand to, to some, to Europe, some to south America, some to Canada, but we’re, we’re running well ahead of last year’s numbers on, uh, on export demand.
So let’s sorry I’m bouncing around, but it’s, it’s kind of market. It is. But, um, so the big wild card is, uh, what’s Russian oil gonna look like on the market going forward with EU, uh, sanctions expected to take place December 5th. Um, can you kind of retrace what’s been going on with Russian supplies that have been able to at first were down sharply then have come back strong and where you expect them to be going forward?
Yeah, I, I think where the market, at least relative to expectations where the market got it wrong was on Russia’s ability to, to export. You remember in, during the spring, uh, the IEA was saying Russian production could be down by 3 million barrels a day and you know what a lot, most of the banks were around two, you know, two to three. So let’s say the market expectations were that, uh, Russian exports would be down, let’s say two and a half million barrels a day in the, um, you know, so during Q2 Q3, you know, in that, in that period, but in actuality, in, uh, Q2, they were only down by three to 400,000 barrels a day. And in Q3, they’re probably down by like 600,000 barrels a day, or just, you know, a fraction of what the market had expected, which of course has been another bearish factor in the market is Russia’s ability to export now, how did they do it?
Well, they changed their markets. They moved India was taking zero, uh, Russian, and now we’re taking up to a million barrels a day. Now, why are they doing that? Well, there’s been a huge discount. You know, it’s 30 to 20 to $30 a barrel discounted on, uh, Russian crude. China’s been taking more, uh, and EU is still taking. I mean, they’re, they’re taking, uh, in July EU took 1.7 million barrels a day of, uh, crude and 1.1 million barrels a day of, uh, of products according to the IEA and, and they’re, so that’s 2.8 in January, they took 3.8. So we, you know, they’ve lost a million, but they haven’t lost all of it. So, um, you know, rush rush has been able to export. Now, the big question is what is going to happen with the embargo? And, uh, Jim, I know you and I have been back and forth on, uh, you know, on price caps and price controls. And, uh, you know, the,
I was gonna say, uh, there was, I remember a, an economist talking about Richard Nixon and he sh he said he shouldn’t have been impeach for maybe he shouldn’t have been impeach for, uh, the Watergate cover up, but he definitely should have been impeach for wage and price controls. So, because they were, they didn’t work. And I was just wondering, I, I, I’m not sure what the me mechanism is, but Russian oil’s already discounted heavily to the rest of the world barrels that that’s correct. Right,
So the spreads around, is it 20, $25 below Brent? Is that the way it’s works?
No, that’s a moving target, but let’s say 20 to 30, 20
To 30, below,
20 to 30 below. Yeah.
So you already have a, a discount in place. It’s go as hard as it is to keep Russian barrels from flowing to, you know, there’s, it’s always in the interest of somebody to, you know, try to get outside the embargo and, um, you know, I’m not sure it’ll be an easy thing to implement, you know, a price ceiling, but, um, so what, what’s your, what’s your number basically on how much this embargo will restrict oil exports from Russia? Or do you, do you have one?
I, I, I don’t really have a, a, um, you know, there’s still gonna be pipeline exports, uh, coming in it’s the, the embargo is for EU all seaborne exports, which in July was about 1.1 million barrels a day. Let’s say a million barrels a day. The, the big unknown I guess, is gonna be on insurance because the, you know, the embargo doesn’t allow the, the Western Western insurance companies to ensure the seaborne exports and, you know, something like, uh, 80 to 90% of all of all these seaborne exports are, are insured by the west. Uh, it doesn’t mean however that other countries, you know, that there can’t be insurance, self insurance from China or India or something else is, is worked out. You know, the key thing is that China and India, uh, who have been taking much of, of Russian exports, you know, they’re not part of this embargo and on the price cap, I’m not, I’m not exactly sure how that’s, you know, how that’s gonna work. You know, I think they’re looking at a different, you know, a fixed differential, the brand or who, you know, I’m sure they’re gonna work out some kind of formula they’re talking about the marginal cost of production. You know, I, I think it’s clear there’ve been a lot of academics and economists working on this, Jim
Get into marginal cost of production,
You know, <laugh> yeah, I know. And right. I, I guess my feeling is that, you know, a lot of these things, those, those barrels will find, they may not go to Europe. They’ll, they’ll just rearrange the trading route. You know, you, you it’ll be less efficient, but the barrels will get out there. And as far as, uh, supply demand balance for the, for the world, it may be short term problems, but once they get ’em figured out, you know, just, just like it’s already happening. Um, I, I don’t know if China and India can take more barrels of discounted Russian oil, you know, it, I guess it depends on their demand structure, but is there, is there a, a problem with the refineries, can they take this kind of oil or is it, is that well that an issue, is it not an issue China
Won’t, China’s not taking anymore Uhhuh? Um, you know, they’ve been, they’ve been up again, you know, using some IA numbers here, but they they’ve been taking, I don’t know, like 1.8 million barrels a day to 2 million barrels a day, but the thing with China, and this is, you know, this is why they won’t be taking anymore is that they, they really want to diversify supply. That’s one of their number one, uh, tenants in, uh, on, on their, uh, import mix is they don’t want to become too heavily reliant on, uh, any one supplier, you know, which I think is less that, uh, Germany could have taken from, uh, you know, from the Chinese. So they’re not gonna take any more Turkey. Yeah. I, I also wonder, you know, they’re, they’re up to, you know, a million barrels a day and I, I don’t know if they’re, you know, if, if they’re gonna be taking anymore either.
Um, yeah. It certainly adds, uh, a little more uncertainty into the, uh, into the market.
Yeah, yeah, yeah, yeah. Definite, oh, no, no, no question. And I think like you, you know, the point you were making yeah. The one thing they, there probably will be, is a lot of dislocation and, um, you know, sometimes and dislocations can be very bullish for, uh, for markets, particularly on the, uh, on the structure. Interestingly though, this, the structure’s really like collapsed. I mean, you look at WTI, the, the front to backs are trading in, you know, the first M one minus have sent two is like in the thirties or 40 cents, mm-hmm <affirmative>, um, relative to, you know, two, $3 earlier. And even Brent is, is down only seven, you know, 60 to 70 cents. So, you know, for now the market seems pretty well supplied based on, you know, based on, on what’s happened to the, uh, to the curve.
So I guess, um, China demand, let’s say the lockdowns stop is pent up demand. Is that enough to pull this market out of the doldrums?
Yeah, it, it, it could, I’m sure there’ll be, you know, prior to the, you know, prior to December 5th, maybe there’ll be some demand surge maybe. And, you know, as I said, as we head into December where, um, you know, we’ll, we’ll, we’ll, we’ll see what, you know, gonna be dislocation, post and Bargo. Uh, so maybe that’ll, that’ll help lift the, you know, that’ll help lift the market, uh, as well.
Yeah. I, I mean, I’m looking at, I’m looking at the market now or down about three bucks today, so I’m trying, trying, and I know our podcast is supposed to be good for like a month, but, um, I don’t want to get, I
Know, you know, you in the monthly, uh, which I wrote last week, um, you know, late last week, I’m, I’m thinking, all right, you know, what I think’s gonna happen is that the trading range is gonna look, be lowered, right. We’ve been in an 85 95 trading range recently on 85, 97. And I, I think, all right, you know, we have this embargo coming up, I think it’ll be lowered by a few dollars, you know, maybe like 82 to 94 or five, if things get, you know, a little outta control on, uh, you know, with the embargo or anything else, uh, you know, we’re, we’re, we broke 85. Yeah. And the market just doesn’t look, we could get there right away.
Yeah. It’s a, it it’s interesting. I mean, in your monthly, you said you had a bearish bias for crude oil, so I’ll give you credit for that. Um, it’s also seems like there’s a lot less volume going on and open interest is down. And, you know, because of this uncertainty everywhere, it seems like a lot of people have backed out and maybe, maybe that’s everybody went on holiday for August, but, um, we’ll have to see if we start seeing open interest build, uh, going forward, oil markets really seem to get agitated, uh, in, in bear markets when a Mar you know, you get these big moves down. Obviously they get agitated when, uh, when, uh, uh, a war occurs as well. But I’m saying in general, it, the markets get really crazy volatility explodes on a, on a way down. Just one thing that I’ll, I’ll bring this in.
Speaking of options. Um, we, we, this is a market that has been clearly. If you looked at the option paper, I know there’s buy for every buyer. There’s a seller, but the initiators of, of trades seems to be on the Polish side. And, um, option volume has been low, but you see these blocks of trades, these gigantic trades, 20,000 lots at a clip where I dunno if it’s the same person. It sounds like it sounds like a, it wouldn’t be a very popular strategy, but they’re buying these $1 wide call spreads. So in December of 22, just a couple days ago, 20,000 one twenty four, one twenty five call spreads went, if you look at the major open interest, uh, it’s in the one twenty nine, one thirty call spread, there’s like 50,000 of each, these 1 49, 1 50 S they’re in the top 10, our old favorite, the D 100 still has 43,000 open interest.
And then you see a little chunk on the D 200 call and the D two 50 call. So my, my point is, there’s this like, still this bullish sort of long term. Yeah, we’re low now, but next quarter, you know, we’re, we’re gonna be well over a hundred bucks, which, which could happen, but it’s it’s. Yeah, yeah, no, it’s a crazy market, definitely. But on the, on the put side, what what’s missing in this, if you think that, you know, the future’s market sends us to an area where roughly it’s 50% chance of going higher, 50% chance of going lower, what was missing is the sort of the downside put buying. Um, and I’m not sure, I think there’s, I don’t think anybody’s doing that spec trade. And, um, and there’s probably less, uh, less hedging going on by buying, uh, those puts and may, maybe that’s what it is.
Cuz when you, when you look at the, uh, top 10 open interest, it puts, it’s still like the D 60 put the D 50 put the D 40 put, and it’s only about 20,000 lots and these things were done, you know, maybe over a year ago. So it’s kinda like where, where, where is that part of the market? And uh, maybe, maybe we’ll I guess when we do see it, it’ll be time to, to buy when we see the put buying, coming out in, in, uh, in, uh, big size, it’ll be time to go the other way. But we, we just haven’t seen that. That’s one of your contrary indicators. Yes. Right. It’s a contrary indicator. Some sometimes, but the other kind of crazy thing going on that, uh, I posted in LinkedIn today, that’s not, I wouldn’t say it’s real news if you’re following in that gas market, but the, um, the fab implied volatility is hovering around a hundred percent.
So you’re talking about an option. That’s five months out. It’s not the front month, that’s a hundred percent, it’s the five month out. And obviously it’s, it’s, uh, seasonality the winter stuff, but that’s a, that’s a huge number out there. And, and if I take that a little further, if you look at the, the skew, so we, we take a 25 Delta, uh, 0.2, five Delta on a, put in a call, subtract the implied volatility and a natural gas for October. The call is eight vow points over the put and for February it’s 25 vow points over the put. So that’s, those are, those are big numbers now for crude. The, the skew, except in, you know, these warlike, uh, instances is usually a negative skew where the puts over the call and that’s what we’re in now. So for October it’s minus five and for February it’s minus seven. So that’s kind, kind of a, you know, more normal looking market than, uh, natural gas. So, I mean, we’re not covering natural gas, but I just wanna point out how, how crazy these, uh, energy markets are all around.
Well, I, I think the one that’s been completely outta control has been the, the Dutch TTF futures.
Oh yeah. Uh, yep.
They traded over the equivalent of over, over a hundred dollars for, mm, B T U to either early last week or the week, week before last and that now they’re back down to like 60. Um,
I was gonna say any, so unlike the Dutch tool, tulip bulb rally, this, this rally had some really fun fundamentals behind it.
Yeah, no, no question, but it does look and, and of course, natural gas, you know, European, natural gas price is real. It, you know, definitely has an impact on, um, you know, on, on the petroleum markets and that, uh, there, there could be some fuel substitution. There was, there definitely was some fuel substitution, you know, direct burning of crude and some, uh, residual fuel, you know, residual fuel burning instead of, uh, instead of natural gas. The, the, uh, I think the IA was saying that they think it’s four or 500,000 barrels a day increase in demand. I don’t know if it’s that high, but ne nevertheless, you know, we’ll, we’ll see, as, as we headed into the, as we head into the winter, you know exactly what that number is gonna be. And yeah, that’s an increase in demand, but I, I think the economic effect is probably gonna be greater than what that increase is, you know, again, depending on the, depending on the weather, but, um, you know, I, I think Jim, that Dutch TTF futures, you know, that has to be, I, I did look at one point, it looked like the balls were like 170% or something
Like that. Yeah, you’re right. I mean, there’s no, there’s no option sellers left, you know? I mean, you, you can’t, it means just, uh, I won’t say it’s a broken market, but it’s, um, you’re, you, you can’t, I mean, if you’re a risk manager, you can’t sell it, right. You can’t sell Val be crazy.
No, you can’t sell Val. And if you’re, if you’re a risk manager in that market, you know, your, your hair is probably gone gray very quickly. Yes. I’m sure your sleep sleepless. I’m sure your sleep is bound to zero along, you know, traders, probably the same thing. I mean, the, you know, the, the, the press has been pointing out that, uh, you know, a lot of the governments are going, a lot of the European governments are going to have to subsidize the utilities just to make their margin calls.
Right. Yeah. It’s been a story around. Yep. That’s, it’s, that’s an interesting risk management issue because we, we have, and you and I have talked to pure producers who, um, will hedge say 10% of their production and the market will run up and they want to hedge another 10%. And some banks will say, you know what, we can’t, we can’t, uh, give you the credit for, for, you know, margin money. And even though with a higher price, they’re a better, they’re a better credit risk, right. So if you’re, it’s a, it’s a, a conundrum, but you know, the banks can’t keep, you know, you almost need the, uh, central bank to get in there as a, uh, lender of last resort because you, you, you know, it’s, it’s a mismatch of cash flows between time periods or, or not because maybe, you know, you’re not, you, you’re not gonna charge retail, these, uh, uh, customers, these crazy prices, middle class, and the poor people can’t can’t afford it. You know, it’s just, uh, crazy. But, um, yeah, we’ll see how this, the other thing you don’t wanna do in Europe, Andy is quote the, uh, game of Thrones, uh, quote, that’s been used a lot. Winter is coming that’s, that’s not, that’s just not funny anymore.
If you’re a risk, if you’re a risk manager, if you’re your own personal risk manager, don’t do that. But, um, so let’s, let’s go back to oil for a second. One of the worst acronyms of all time, the J CPA, the joint, what was it? Comprehensive plan of action. I mean, that’s, is that
J C P a
J C P a, sorry, J C P O a. That’s gotta be such bureaucrat ease. What’s the chances of Iran bringing something back on sort the market in the next?
Well, I think the market is, you know, it’s not it’s we’re in September, so it, you know, I think for the balance of 20, 22, it’s, the chances are probably zero. And, uh, as we move into 2023, you know, I, I don’t think they’re all, I don’t think they’re very high, however, you know, in past negotiations at the very, you know, as, as they’re closing the door for good, you know, the, the Iranians have come back with, you know, something, something substantive actually to maybe clench a deal now, right now, what they’ve come back with, the us, the, the us and the, and the, um, you know, the other signatories to, to the deal have rejected it at out of hand. So, you know, right, right now they’re nowhere. And, and these negotiations continue to move in, uh, move in circles. But, uh, as I said, you know, past, past behaviors, any is any indication of future. Um, there is a chance that the 11th hour that the Iranians come back. So I wouldn’t put it at zero Jim. Right. But I wouldn’t put it. I wouldn’t put it at really high, you know? Yeah. I wouldn’t put it at like over, you know, 30%, 20%.
What, so what, what about leakage? Is that growing? Well, they
They’ve been pretty they’re they’re production has been pretty steady. They caught a break on heavy fuel exports to Saudi Arabia because the Saudis decided instead of doing, because crude was so expensive, they decided that instead of doing their usual direct, crude burn that they do every summer, um, that they were gonna, they were going to use residual fuel as, um, you know, to help them produce power for air conditioning in the, in the, uh, in the summer. And, and most of that residual fuel came from, uh, most of that marginal residual fuel came, came from Iran, but, you know, there, there has been leakage, but it hasn’t been like they’ve been able to increase, you know, increase a significant amount, you know, maybe a hundred thousand barrels a day here, or, you know, 200 here. And as I said, I think the summer they did pretty well because of the Saudis. Ironically, how ironic is that?
Yeah, I it’s, um, it’s interesting. I mean, if you want a, a lot of, um, pressure gets put on some, maybe not such friendly regimes, if you have really low oil prices, you would think that you could, you could do a lot more by getting Iran barrels back onto the market. Maybe a don’t ask, don’t tell type of policy saying for Venezuela, don’t I, you know, just maybe get these guys, get prices down and putting pressure on all the people, um, that have not, let’s just say, have not cooperated. You certainly put pressure on Russia as opposed to doing all this, uh, embargo stuff. It it’s, it’s not gonna happen, obviously.
Yeah. It’s not it politically, it’s just not pable
Um, one thing that, one thing that they could do actually is try to find the long lasting solution to li cause right there there’s, there’s something that, you know, is not a political, you know, I don’t think at least the us, you know, that’s not a big political, there’s no big political agenda, I don’t think for Libya. Right. Um, um, so, you know, it would be nice if Libya, which is essentially the marginal producer now, you know, if, if Libya could become a reliable exporter rather than an unreliable exporter. Right. Um, and you know, recently there were clashes in both li Iraq. Uh, there were clashes and the market really worried about it and, you know, for good reason,
Of course, yeah. Iraq is doing a good job pumping oil that’s for sure.
Four, six, something like that.
Yeah. Yeah. They’ve got, you know, they have some spare capacity, not, not a whole lot. I mean, that’s the other bullish factor is there’s not, there’s not, not a tremendous amount of spare capacity in the, in the world. And, um, you know, Saudi has some, but they’re, you know, they’re, they’re up to, you know, they’re, they’re close to 11 million barrels a day. We’ll see if they’re able to produce at that. And maybe they’ve got, you know, a million, a million and a half spare and UAE has some spare capacity. So, you know, and, and that has in the past been the ver you know, really bullish factor as we start sucking up. Uh, any, any spare capacity.
Andy, can we, uh, talk about cracks for a minute?
Yeah. Cracks have been unbelievably interesting.
Yeah, I was gonna, I thought you were gonna say
Particularly the diesel crack.
Yeah. Go ahead. Start with diesel.
I mean the diesel crack, holy moly. I mean, diesel crack went, went to like, you know, over $70, right. Uh, it’s still at like $62. These are, these are great numbers. And obviously given, given where the numbers are, you know, any refiner, if they could, you know, would produce as much diesel as they POS you know, as, as possible. Uh, but you know, they, they can’t, uh, not that they, you know, we, we’re not at the point where we’ve been able to build diesel diesel stocks. Um, we’re, we’re in diesel is, you know, LA last week’s numbers were like 112 or total dis it’s 112 million. And it should be for this time of year around 145 million. And, and this is why the crack is outta control. Most of the shortfall is here now it’s in new England and central Atlantic. Yeah. And where do we use heating oil, new England and central Atlantic.
So, you know, we’re, we’re in, you know, we’re not gonna make it. I don’t think, you know, to build to anything, to, to build anywhere near what, what we need up here now, certainly heating wall demand has gone way down over the last couple of decades, but still, you know, there’s heating wall users and, and we’re, we don’t have it. So, um, and we’re going into turnaround. So I’m not, you know, I, I, I think we’ll see a modest build over the next couple of months, but you know, those, those cracks may just come off cuz they’re at 72 62, but you know, I don’t, I don’t see them collapsing unless the diesel yields really start pumping it up into the mid thirties, which they won’t. Um,
So you mentioned earlier that we’re exporting a lot of diesel, so you’re saying it’s from the Gulf. It’s not coming up to the Northeast, Andy <laugh>. Well,
Jim, there is something that you and I have talked about for a long time and that is the Jones act. Right. Uh, you know, maybe if there’s any kind of, you know, maybe if we get one of those ridiculous 1989 winters, right. Um, you, you re I’m sure you yep. Uh, if we get one of those, you know, maybe we could do something about, uh, getting rid of the, uh, getting rid of the Jones act where, uh, basically you can only transport us produced products through us ships and, uh, you know, it makes the production of, uh, it makes the transport, the distribution of us products really expensive by ship.
You, uh, you brought up 1989, I’ll just make this quick. But that was the first year I gave out the option trade of the year award. One of our favorite customers came into our office and said that I’m bullish on the heating oil seasons. I wanna buy calls. What’s the most bullish thing I can do. And so I gave ’em a trade where you, you sell an at the money or a little bit out of the money. You take that money and you buy a whole bunch of out the money calls. And he said, that’s too complicated. I said, okay, find the highest strike price you can and buy a whole bunch of them, which he did. And the market went up so much. They went in the money and he sold them out and he did it again. He bought a bunch of deep outs and the market went up again to that level and he did it again. And the market went up again. He made, he made, you know, the risk. He made millions on just a, you know, a few dollars, basically. It was one of the greatest trades I’ve ever seen. Anyway, let’s get back to, so,
So anyway, tell you something, if we get something where, you know, like this pipeline issues and it it’s free, you know, that winter oh yeah. Everything that could have possibly gone wrong, went wrong. The refineries went down in the Gulf coast cause it was freezing, you know, and then we had pipelines got messed up and then was freezing up here. Right. I mean, it was, it was one thing after another. Right. And uh, you know, stocks are so low in up here that, you know, something like that, you know, demand is way less than it was 25 years ago. But wow, Jim? Yeah, that was 33 years
Ago. Yeah. That was a long time ago. Oh man. <laugh> uh, refining, you mentioned turnarounds. Are these refiners running really hard or is this like, uh, uh, business as usual? Are they going? They get basically the, the turnarounds are the scheduled maintenance that, uh, refiners go through starting in September deep into, into October. Um, right. What, what’s the, what, what’s your thought there? How much, how much, uh, is gonna be taken out for, for, uh, maintenance? Well, it
Should be, you know, it should be if, um, I I’d say an average, it looks like it’s gonna be an average type turnaround season, but you know, at any one point, uh, over the next couple of months, there’s gonna be, I shouldn’t say at any one point at points there’s gonna be, you know, well over a million barrels a day down, um, you know, maybe the average is, is a lot less than that. So, you know, it’s, it’s pretty good turnaround season. The other thing, you know, we had, it’s September, October, it’s hurricane season, there haven’t been any hurricanes, you know, there’s like one named storm, two named storms and you know, hasn’t even come close to the Gulf coast. But as we learned with, uh, you know, as we’ve learned in the past, it only takes one big storm. So that’s another thing to look at.
Um, last point I wanna make on the cracks is that the gasoline crack has really come off hard basically, cuz demand has been, you know, horrendous, not horrendous, but it’s really been disappointing in July and August. And, uh, inventories are now. Now in terms of a day, supply are well or like a half day above the, the five year average cracks went down to $12 at one point from like the forties or forties or fifties earlier in the, in the spring and summer. You know, I think gasoline’s a little oversold here. I, I still have a hard time believing that demand is as bad as what the Weaks are saying, but you know, if it, if that’s true, if it, and, and you know, they’ll be revised two months from now, so we’re not gonna find out until two months from now, but you know, in any event demand really isn’t that bad. You know, I, I think gasoline’s way oversold and it could, you know, I, I think we could see a little bit of recovery and the cracks have recovered, have recovered some
Before we go, cuz we’re up against the time limit here, can you just mention how someone might be able to subscribe to your monthly cuz it’s you have a lot of good stuff in there and maybe some of our listeners would be interested in getting in on a regular basis.
Yeah. you can subscribe by getting a hold of me at email@example.com can also go to our website, www.commodityresearchgroup.com. And you know, if you’re interested it, Ed does an amazing job with metals. I try to do as good as I can on the oil and we’ve got some other products there and it’s, it’s a really good summary of what’s going on in the market and what we’re looking for over the next couple of months and Ed is, you know, he’s one of the, he’s always named number one, Ed Meir is always named number one in base metals analyst. And you can reach out to me on LinkedIn, uh, Andrew Lebow.
Beautiful. Anything else you want to add to the podcast today, Andy?
No. There was a lot of material to cover.
We bounce around. I’m sorry about the going from back, but that’s kind of you know, supply demand cross at some point, if you’re talking about, you know, demand, you’re talking about high prices, you’re talking about high prices, you’re talking about supply, so it’s yeah, but uh, great, good job, Andy.
Lot unpack more than usual and it’s usually a lot to it. You know, the suitcase is usually pretty full. It is it while this time it’s like, you gotta pay extra to get it on the plane.
Exactly. You check the bag. Okay. Thanks Andy. We’ll pick this up next month, right?
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