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- [00:01]
IBM Representative
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- [00:33]
Stephen Schork
Bloomberg Audio Studios, Podcasts, Radio News
- [00:38]
Nathan (Interviewer)
Want to take a closer look now at the oil market as the prospects for a peace plan between the US And Iran, along with the threat of further escalation if the war were to continue, have led to wild price springs. Let's bring in swings. I should say let's bring in Stephen Schork for some analysis of what we've been seeing in the crude markets. Stephen is the president of the energy analysis firm the Schork Group. It's great to speak with you once again, Steven. Thanks for being here. As we watch Brent plunge more than 4% this morning, I think we saw a 14% drop after President Trump announced he was going to hold off on going after Iranian energy for five days. I wonder what you make of these big moves that we've seen in your neck of the woods. Good morning.
- [01:23]
Stephen Schork
Good morning, Nathan. And absolutely, and I think it is just the ministry of the amount of speculation that we've seen in this market. At this point we're all focused on the ICE Brent market and the Nymex WTI market, which are Atlantic Basin markets. That is to say that these are futures contracts and the futures is what a derivative and they derive their value off of a physical asset. In the case of Nymex wti, that physical asset is landlocked in the middle of the country in Cushing, Oklahoma, quite a distance away from the straight of Hormuz. So what we really want to focus on is the Asian based markets and that would be the Oman market or the Dubai futures market. And there we see a massive disconnect where the Brent crude oil market is trading at around a 30, $35 discount to, to Dubai, for instance. So in other words, oil where we need it, the oil that is pent up in the straight of Hormuz is trading at upwards of 130, 140, $150 today. So that distance, that schism between the Brent market, the WTI market, those large discounts just tells you that where the shortage is and the shortage of oil is not in the Atlantic Basin. So we're focused on these Prices that are now, okay, yes, Brent and WTI are plunging right now, but their discounts are growing relative to where the actual war is. So what we're still seeing is a market that is now pulling back sharply today based on some rhetoric, based on some headlines, there's no reality there. The Iranians attacked Dimona, the Israeli nuclear site, over the weekend. The attacks seem to have stopped, at least from the Iranian side. And the rhetoric on the Iranian side still seems rather belligerent, regardless of what the administration is saying. So we are still in the midst of a war. The headlines are being pulled back on a headline, but in reality, the spreads are telling us that this war is far from resolved.
- [03:24]
Nathan (Interviewer)
So when you see this kind of disconnect between the physical market and what we're seeing play out in the futures contracts, what does that tell you about where prices could be be once the war gets resolved?
- [03:36]
Stephen Schork
Yeah, absolutely. So what we do is we'll look at, you know, we'll do a little quantitative probabilistic modeling here. And at this point, based on over the next four weeks, we just rolled into the new contract, the contract in wti I'll pick right now, we have a cluster of right around 9261. So right now, WTI is trading just around $88. Our first band, our first envelope. The area where you would expect it to kind of be range bound runs from about $102 to about $85. So we're still within that band, Nathan, of $88, $85. That's where from a statistical standpoint, I would expect to see support. But if we do see resolution, well, if we see a resolution, and what's the best possible resolution, a positive regime change in Iran, then we'll see a significant downdraft in prices, that is prices back into the $50 range. If we see some sort of settlement where oil starts to flow freely through the Strait of Hormuz, but the regime in Iran is still in place, we'll still see a pullback. And our first target, once we break that $85 support, Nathan, would bring us down. Another $20 would bring us down in that $65 range. So essentially what I'm saying is if we do see a resolution oil flowing again, we will see a pullback. And where does that pullback go? Naturally, to where we were before this all started. And again, that would be back into that mid $60 range.
- [05:05]
Nathan (Interviewer)
In the meantime, of course, we've heard from the International Energy Agency talking about this $400 million emergency reserve release from its members. And we heard from Energy Secretary Chris Wright that the first US Flows have started to come into the market as well. How much of an impact could that have on price in the term?
- [05:26]
Stephen Schork
Well, it's an excellent point. And the impact will have is what is distorting that spread I talked about between Brent, WTI and Dubai, Oman. Yes, the. The United States is releasing barrels. Where are those barrels coming out of Houston? Gulf Coast. Gulf coast has plenty of crude oil right now. The same goes with IEA members in Europe. Where's that oil coming out of? From Rotterdam, Northern Europe again, into a basin that is well supplied with oil. Now we have to get that oil from where it's not needed, the Atlantic Basin, to where it is needed to the Asian markets. And that comes at a premium, that comes at a cost. So with that oil coming onto the market, one, it will continue to distort that spread and kind of give a false signal of weakness in Brent and WTI and really kind of ignoring where the shortage is, as I said, in Asia, therefore, it is having an impact. And let's keep in mind, that's a lot of oil, but realistically, you could only get maybe 5 million barrels a day logistically onto the market from those reserves. Well, that's only about a quarter of what we're losing through the Strait of Hormuz. So it is going to have an impact, but a de minimis impact because it's really impacting the markets that are well supplied with oil. We still have to get it to where they're not supply. And again, transportation logistics, so forth. That's going to come at an added cost.
- [06:47]
Nathan (Interviewer)
Hugely informative, Stephen. Again, great to have you back on with us on Daybreak. That is Stephen Schork, president of the Short group.
- [06:55]
Podcast Narrator
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