Mike Norman, anchor, HardAssetsInvestor.com (Norman): Well, what is the outlook for oil prices? Here to talk with us is Stephen Schork, editor of The Schork Report. Hello everybody; I’m Mike Norman. Stephen, welcome back to the program. It’s good to have you here.
Stephen Schork, editor of The Schork Report (Schork): Well, it’s almost a case of déjà vu all over again. If you recall this time last year, we were in the midst of a historic bubble which got oil on to the cusp of $150. At the end of June of this year, we went on another significant run, but we were in a mini-bubble, a bubble that took us to up to $75. We’re now in the process of correcting from that bubble, so therefore no, the price of oil, the price of gas is not reflective of the true underlying fundamentals. We’re still in the position of exercising this irrational exuberance, if you will, out of the market.
Norman: But if we don’t come out of the recession, these prices can’t be sustained; is that what you’re saying?
Schork: Absolutely. Not in this environment; these prices cannot be. We had a correction from the mid-70s; we are now flirting in an area between $62 and $58. For the technicians out there, this is a key area of support. Quite frankly, it’s do-or-die.
Being of the fundamental bent, I think we will see oil below $50. I think we can see $40, I think we can even see $30 oil before it’s all said and done, but it’s predicated on the technicals. If we don’t break support here, watch the speculators come in, watch them drive this back up ...
Norman: I want to talk about this pullback from $72, $73 back in June, because it seemed to coincide with a lot of talk about a new and very intense crackdown from regulatory agencies … the CFTC maybe putting on position limits, there’s always been position limits, but maybe applying now to some of these financial Wall Street firms.
It seemed like the timing was just too correct, and when that discussion came out in the media, oil started to tank. I know last year a couple of bills [came up] in Congress to curtail but nothing was passed. Are we closer to really seeing something happen here in terms of curtailing speculation?
Schork: There’s active talk now on the Hill with regard to position limits, margin requirements, forced clearing. There are a lot of issues out on the table and it’s more than a coincidence that when this talk really began to heat up back in June …
Norman: So you agree that the market or the participants are concerned about this, this time; that maybe something could really happen here now to damp down whatever you want to call it: speculation, investment?
Schork: Absolutely, because I think there is a general belief – with certainly this administration, and I know there was a belief in the prior administration – that speculation and undue speculation was really having an uplift.
Now we didn’t get anything done with the last administration and then prices crashed, so oil prices kind of fell off the radar. But now that we again got back into the mini-bubble, it’s a hot topic again, and I think the speculators – some of these big Wall Street guys – feel that they might be in the crosshairs of Washington right now.
Mike Norman, anchor, HardAssetsInvestor.com (Norman):
Norman: In the last interview, I said let’s take a look at the whole green movement and alternative energy. We have a president in place now who is really behind this trend. What sort of an impact, if any, do you think it’s going to have in the short term and in the long term?
Norman: Yeah, but they said that about whale oil in the 19th century.
Schork: OK, but look at where some of the investment is being forced on: wind technology, OK? Part of why there is a normal inclination, why there’s a convenience yield in commodity prices, a backwardation, prices going down in the future, is because energy has to be dispatchable: I turn my lights on, I want the lights to go on; I turn my thermostat up, I want my home to heat. I want that energy on demand.
You know what? When do I need electricity the most? I need it in July, in August. When it’s very hot, I want my AC on. Part of the reason why it’s hot, Mike, is the wind is not blowing; that’s why it’s hot. So I’m in a catch-22 here where I want that source, but the wind’s not blowing; so what’s going to happen? I’m going to need to keep a reserve BTU– probably natural gas, maybe even coal – in reserve. Now if I’m the company, if I’m one company, what do I do? I have to finance and maintain an inventory of dirty BTUs to compensate the marketplace when I don’t have the technology there.
So I’m never saying never; my problem is that if we are going to resolve this issue, why take a viable option off the table? It’s still leaning toward the hydrocarbon industry taking that option …the most viable economically in the near term; you’re taking it off the market. I don’t think we should not pursue green, I’m all for it; but it should not be at the exclusion of nuclear, of coal, of natural gas.
Norman: Right. Well, the problem is not so much electricity, is it? It’s more fuel to power our vehicle fleet, and what we use almost 100% is gasoline; that’s what the problem is. So there are other sources of electricity; we don’t use nuclear as much as they do in Europe, but we have nuclear-fired plants. But the problem is gasoline, isn’t it? We don’t really have an alternate for that.
Let’s talk a little bit about the cap-and-trade also being pushed by the president. Will this lead to any sort of a conservation? And if so, doesn’t that alleviate or reduce a little bit the demand side?
Schork: The current trading of the allocations – it’s a difficult question because right now we’re in the sausage-making process of the law and what we’re hearing from the industry with regard to being able to transfer this cost on to the consumer, it’s still a very murky area right now. Quite frankly, I don’t have a strong opinion on it, because I don’t think the cap-and-trade position, with the way they’re pursuing it in the Congress, is going to be … I think the law that ultimately comes out is going to be a much different animal than what we’re looking at right now.
Norman: All right, so quickly wrapping it up – just an outlook, let’s say, for the remainder of this year, really all depends I guess you would say on the economy. If the economy stays in the doldrums, and given the supply situation, prices are not going to stay where they are; they’ll go down.
Schork: Well, it depends on where, believe it or not, where the speculator wants to take the market. The economic doldrums are going to remain. We’re probably in a bottoming phase. We’re certainly not in a strong recovery phase, so the argument for $75, $85 – which some of the bigger Wall Street houses are making – I think is a little wishful thinking at this point. But prices right now are right around $60.
If we hold this support, that’s going to encourage speculators, investors into the market; we set the table for a run at $75. If we can break this support in the high $50s, we will see $45 oil. I believe you’ll sub-$50 oil, and I believe we’ll settle into a trading range, which all along is where I think we should be at this point in the economy: between $45-55.
Norman: So I guess the advice is, keep your eyes on the stock market.
Schork: Keep your powder dry.
Norman: If the stock market rallies, I guess the oil speculators …
Schork: Yeah, the oil will follow, if we have a good stock market. So it’s a catch-22: Do I want the stock market to rise? Of course I do, but be prepared, be prepared. If you see the stock market rise, oil will probably follow suit.
Norman: All right, there you have it. Thank you very much to my guest, Stephen Schork, editor of the Schork Report. I’m Mike Norman. That’s it for now, and as always, stay tuned right here at this site; we’ll have a lot more great interviews in the weeks ahead. Take care; bye bye.