We’re experiencing ‘fear of missing out’ in the oil market: Analyst

Stephen Schork, The Schork Group Principal joins the Yahoo Finance Live panel to discuss the rise in crude oil prices reaching the highest price in nearly 3 years, pushing up gas prices.

Video transcript

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ZACK GUZMAN: Welcome back to "Yahoo Finance Live." The energy sector once again the standout in today's session, as we have crude prices hitting three-year highs, both off of receding fears about what's going to happen in Iran there as they're expected to increase supply, now coming back maybe a little bit less than some people were expecting.

And for more on that, I want to bring on the oracle of oil himself here, Stephen Schork joining us once again, the Schork Group principal. And Stephen, good to be chatting. I mean, we talked about oil. And some out there had been calling for kind of a supercycle when it comes to crude.

It does seem like some of that's coming true here as we move past $70 a barrel. What are you seeing in terms of supply catching up to demand as we reopen?

STEPHEN SCHORK: Yeah, absolutely. First and foremost, Zack, this is a demand-driven story. And it's a demand-driven story outside of oil. It's for all industrial commodities. Especially when we look at the steel market, the most prosaic of all industrial commodities, prices since the beginning of the year have essentially doubled, which has dwarfed the significant rally we've seen in oil.

Coming back to oil, of course, it's been a demand-driven story with regard to the pent-up demand that we've seen. And recently the IEA, based in Paris, kind of bamboozled the market, imploring OPEC to increase supply.

So now, first, we had demand leading the market higher. And going into summer, a summer that is going to be much stronger than the market was anticipating just a few months ago, the issue is on supply. So OPEC is playing, taking more of a hawkish stance along with their partner Russia.

And here in North America, the story really has been capital discipline on the part of the producer here. So this is, of course, being dictated by the banks, who have extended a considerable amount of credits. So therefore, we're not seeing the normal knee-jerk reaction in US production, given these high prices that we would have seen just a couple of years ago.

So right now, we're trying to control supply. And demand is running rampant. Wall Street has taken notice of this. And speculators have moved into this space to take advantage.

And it's getting to the point now, guys, where high prices are becoming the excuse for even higher prices, the so-called fear of missing out phenomenon in this market.

AKIKO FUJITA: There's a lot of FOMO going around, not just in this oil space. But Stephen, if we're already looking at prices above $70 a barrel with supply already tight. And you're saying it's going to get even tighter going into the summer. How much more upside do you see in the price action?

STEPHEN SCHORK: Yeah, absolutely, Akiko. So since the Memorial Day holiday, which we saw very good demand, we've had a $0.06 rise in oil prices. Now, based on the normal correlation between crude oil prices and retail gasoline prices at the pump, that translates into another $0.14 rise at the pump.

Since Memorial Day, we've already had about a $0.04 or $0.05 rise. So we're looking at a potential another $0.10 to maybe $0.12, which would push the National average from where it is right around now, about $3.07 to about $3.20 cents.

So to go back and answer your question, how high can we go? When we measure the market's price elasticity based on its recent volatility, we're looking at WTI prices in our modeling over the next month certainly within that $73 to $75 range. I've got about a 95% confidence interval that we will hold below 95% based on the quants. But that said, anything above that, we're looking at the $80 magical number.

Now, that's certainly within the realm of possibility, especially if demand comes back stronger than we're already anticipating. So therefore, you do have that upside volatility, that elasticity that could get us to that magic number of $80, which, of course, at these levels would be about another $10 higher, which would translate into a significant increase at the pump, to the point where we will hit the market's inflection point. So $80, from a fundamental standpoint, from what the consumer can handle at the pump would just to be about this market's top through this summer.

ZACK GUZMAN: Wow. All right, so potentially $80 on crude here. But when we talk about maybe the countering forces, right? We always talked about the way that shale producers would just turn production back on if we got up to these levels. But when we talk about how much money has flown out of maybe investing in shale producers here and capex coming down-- I mean, talk to me about that and how quickly production can ramp back up to maybe, I guess, cap the upside here in the oil market.

STEPHEN SCHORK: Zack, there's certainly no concern with regard to production going in the summer because we still have a significant amount of ducts. These are drilled but uncompleted wells. So this is essentially the producers' inventory of supply that they could bring back to the market in rather quick fashion.

So in the here and the now, there really isn't a concern about the US shale producer or our friends up north bringing oil back to the market at these levels. And certainly, as I said before, capital discipline is the order. But at $70, $75 dollar oil, you have to imagine a significant amount of this forward production is being hedged. So producers are correctly-- or if they're not, I recommend they should be-- locking in these prices out into the future because these are very attractive prices going forward.

AKIKO FUJITA: Stephen, I wonder if we can talk more long-term here. A number of developments have happened over the last few weeks with not just US oil majors but as well as European oil majors facing pressure from shareholders to try and curb production out of concerns around climate. You had the IEA coming out and saying that all oil and gas, at least new projects, needed to be halted in order to get to that net zero goal of 2050. How are you looking at all of that in the context of supply and what that could mean down the line for the space?

STEPHEN SCHORK: Yeah. Let's go back to one of my favorite cartoons growing up with Dick Dastardly, the evil guy rubbing his greedy little hands together. That's OPEC and that's Russia right now because oil demand, while we are in a twilight industry, certainly through the remainder of my career, oil demand is still going to be there. Growth is still going to be there.

So this fetish by Wall Street to pressure the west to decarbonize their assets plays right into the hands of, as I said, the national oil producer, whether it's within OPEC or Russia itself. So clearly, what we're seeing is the old mantra in finance that capital goes where it's welcome, stays where it is well-treated. This is clearly the message that is not being sent to Russian oil companies, hence their decision. And their hands are being forced to, quote, unquote, "decarbonize."

This is only going to lead to greater volatility as capex in the industry dwindles in the years ahead. This is only-- and I mean, this is just common sense. What we're going to see is, as capex falls and as demand continues to grow, albeit glacially, but it's still going to grow. And as capex dries, we're going to of course, lead to greater volatility and higher oil prices in the foreseeable future.

So again, if you are a national oil producer, Saudi Aramco all the way down the line, your prospects are looking pretty good over the next few years.

ZACK GUZMAN: Yeah. Especially if we do see, in that short term, that $80 price target potentially hit. But there's a reason we have you back on all the time. You're the smartest man in the energy space, I often say. The oracle of oil, Stephen Schork, appreciate you coming back on to chat with us today. Be well, Sir.