Stephen Schork, the Schork Group principal, breaks down the interest and inflation visible in the oil markets, as seasonal trends remain vital for gas prices going into the winter seasons.
- Welcome back. Well, oil prices are heading for a weekly dip as the dollar strengthens. And here to discuss the implications of that is Stephen Schork of Schork Group Principal. Sir, thank you so much for your time here. Tell me, how much does the dip remind us that oil prices aren't just about supply and demand and the balance between them, but also, monetary policy.
STEPHEN SCHORK: Yeah, absolutely. To your point, supply, demand, of course, but there are other exogenous factors that impact all commodity prices, certainly, monetary issues, geopolitical issues that we're seeing now in Belarus, weather issues, and pure out speculation. To go back to monetary policy, a stronger dollar is bearish for all commodity prices.
So there is that inverse relationship. Commodities, for the most part, global commodities are priced in US dollars, so when the dollar strengthens, that makes commodities more expensive in non-dollar denominated economies. So a strong dollar is bearish for oil and for all commodity prices, for that point.
- Yeah, Stephen, I mean, when we talk about what President Biden wants to do about this, he's said that it's a top priority to kind of reel in inflation, and obviously, gas prices are a key thing that American consumers pay attention to.
We've been talking this week about people reporting seeing stickers at the pump, President Biden pointing to the gas prices saying, I did that. A lot of Republicans chiming in about how much this is to fall on his shoulders. And I don't know how fair that is, obviously, right, when we're coming out of a supply crunch in the pandemic, and kind of the supply and demand dynamics of all this. But you've been kind of pointing out that there are some pieces that he could pull here to kind of alleviate some of the pricing pressure. How do you rate it?
STEPHEN SCHORK: Yeah, absolutely. The fundamental shift we've seen to higher prices-- look, fundamentals don't move that fast. This has been, to your point, in the process of building prior to the Biden administration.
Biden certainly is not helping it with the rhetoric that we are seeing because he's violating the first lesson of economics, and that is to say that capital goes where it's welcome, stays where it is well-treated, and clearly, capital is not welcome in the fossil fuel industry. So we will reap the unfortunate benefits if you're bullish of higher oil prices for years to come. Now, in the here and the now, what we are seeing, certainly, there is that fundamental shift in the market, and a lot of this is based on geopolitics outside of our own borders.
We have the situation now in Belarus where Belarus now is threatening to cut off gas supplies going into Poland and to the rest of Europe. This is a problem because a month ago, because of low supplies of natural gas and a lack of renewables to compensate for that, you had natural gas prices in Europe trading the equivalent of $230 of crude oil. So it is inflation all around the board.
The White House's, you know, ability to address is rather limited. Some of the prospects that we've heard are a release of barrels from the Strategic Petroleum Reserve. But we have to keep in mind, we do not use crude oil. That is, the consumer.
We do not put crude oil into our cars. We do not put crude oil into our furnaces. We put the refined product of crude oil in. So, Yes, putting more crude oil on the market, yeah, that's gonna put more oil onto the market, but not necessarily what we need because of our refinery capacity to turn that crude oil into what we need.
The other aspect that we're looking at is a potential ban on crude oil exports. One again-- once again, we're gonna back up crude oil, and that doesn't help either because the United States does not burn, necessarily, the oil we use. We refine-- excuse me.
We produce a very high-quality oil. Our refineries in the United States are the most sophisticated in the world. They are capable of burning a heavier, dirtier crude oil which is cheaper.
So what we do here is we export our caviar and we buy back tuna fish. Now, if you cut off those bands, we're not gonna reap the benefits of those higher priced crude oil barrels and all it's gonna do is back up crude oil in the United States, and once again, we don't necessarily need it because we can't necessarily refine it into what we really need. So we're not looking at policies that necessarily are going to move the market from a fundamentally driven standpoint.
- And then, as well, the president has been pushing OPEC to release more oil, turn on the tap, but they have refused to do that. I wanna turn your attention now, though, to natural gas. And you say in your note that natural gas is a consummate contrarian. What do you mean by that?
STEPHEN SCHORK: Yeah, it's a contrarian's contrarian market. Natural gas has two seasons. Of course, the heating season during the winter when we burn natural gas to heat our homes, and in the summer, when the utilities burn natural gas to create electricity so we could run our air conditioning. So once we get into the shoulder months, late August, September, October, and then, of course, April, May, and early June, demand hits its nadir.
So we are looking at natural gas that is just coming out of its weakest demand of the season. And yet, a month ago, natural gas prices hit a 10-year high. Counterintuitive, because demand is at its weakness.
And what tends to happen, if we look at history going back since 1990 when natural gas became a regularly commercially-traded market, 68% of the time, we've seen the high in natural gas prices for the winter put in before the start of winter, i.e, the solstice and on December 21, and nearly 60% of the time, we've seen the high in natural gas prices by the end of November. In fact, over the last 30 years, the average high price for each winter has occurred on November 30, so two months prior to the coldest part of winter. So it is that contrarian play where, if you know a little bit of history, you bought into this rally, but you're certainly not holding on to your natural gas prices because historically, we're going to see a retracement in prices as we enter and go through winter.
- Lastly, Stephen, just to kind of wrap up here, when we look at oil prices, now down third week straight, worst stretch since March, I mean, when you look at kind of where it could go, it seems-- it would seem odd if we just kind of level out at 80 and stay here versus, you know, everything we've seen up until this point. Where do you see it going? If we do particularly see a pretty rough winter, where the price of oil goes to year end in your eyes?
STEPHEN SCHORK: Year end, we have to keep in mind that bets on $100 crude oil between December of this year out through December of next year, open interest, the amount of contracts of people betting on $100 oil has risen 500% since the start of this year. So there's a considerable amount-- put it this way, there are people betting on $100 oil. The volume of those bets could refill the NYMEX Cushions Storage Complex five times over.
So clearly, if we have a rough winter, we are going to see-- and, yes, $100 plus oil is certainly a possibility. So we should be happy with gasoline prices at $3.40. Keep in mind that these gasoline prices are winter-grade gasoline prices. Winter-grade gasoline to manufacture is much cheaper than summer gasoline.
So if we do see $100 oil, and we make that into the spring when we have to flip over to summer-grade gasoline, which is much more expensive to refine, then we're looking at natural-- excuse me, gasoline prices, instead of $3.40 on a national average, we'll be paying-- playing closer to $4 a gallon. $6 if you're in California.
- All right, so, yeah, you can't always-- you can't forget the Californians who always get mad when we talk gas prices and say, that's nowhere near what I'm paying. Stephen Schork, though, the man I like to call the Oracle of Oil.