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Gas prices: 'Part of that demand destruction' is due to prolonged inflation, strategist says

The Schork Group Principal Stephen Schork joins Yahoo Finance Live to discuss oil markets and gas prices, and how inflation is making an impact.

Video Transcript

DAVE BRIGGS: All right. Oil prices have fallen to their lowest levels in months. Crude prices hit their lowest point since January. Now at below 90 bucks, 89.26, Brent, at 94.94, lowest since March. Where are we headed? Stephen Schork is the co-founder and principal of the Schork Group joining us now. Good to see you, sir. How low can we go? And what is driving oil prices so low?

STEPHEN SCHORK: Oh, right now, what's driving oil prices today is the news twofold. First, the disappointing numbers coming out of China that China had a severe economic contraction in latest read, and also progress being made on the Iranian nuclear talks. So we're at a situation right now where the global economy is on tenterhooks. Are we, are we not in a recession? I do think we are currently in a recession, and hence why we've seen a tremendous pullback in gasoline demand here in the United States to the point where gasoline demand is about 200,000 barrels a day below normal.

That is to say adjusting for seasonality, we are 200,000 barrels below where we normally are. So a significant pullback demand, signals out of China that demand that contagion might be spreading, and also with the possibility of Iranian oil coming to the market. And it is now the middle of August. So we only have about four more weeks and then we transition out of the peak demand season for gasoline. And as we go into the shoulder months, September and October, demand will continue to fall off.

So we have a confluence of events. Some of them are good. That is to say the season is coming to an end. So demand will fall. But some of it is bad. Part of that demand destruction is because of consumers are taking a prolonged hit to their wallets.

SEANA SMITH: So Stephen, what do you think this means for gas prices? We just had it up on the screen. It's $3.96 today. That's the national average. You're talking about demand falling even further from where we are today once we get out of this peak summer demand season. Are we talking 3.50? Below $3.00? Give us a better sense of what we could likely be seeing at the pump.

STEPHEN SCHORK: Sure. $73.50 is well within hailing distance. If for no other reason, if the market just was in a vacuum right now, beginning on September 15, we begin to transition from summer grade gasoline, which is very expensive to manufacture, to winter grade gasoline, which is cheaper to manufacture.

So historically, when we get into that early September, late September area, we see a $0.20 decline in gasoline prices simply because we're putting a different type of gasoline into our cars. So clearly, we're looking at least another $0.20. So that would get the national average down to $3.70. And then when we look at the current correction that we're seeing in crude oil prices, for every $1.00 move in crude oil prices, you see about a two, 2 and 1/2 cent move for retail gasoline at the pump.

So given that we've come off another $10 from the recent means, we're looking at potentially another $0.20. So yes, I think $3.50 is eminently doable from now until the start of the fall.

DAVE BRIGGS: Great news for the consumer. We stop tapping the Strategic Petroleum Reserve in October. What impact will that have?

STEPHEN SCHORK: It's a good question because right now, the SPR now is down at levels since the last time my hometown Villanova Wildcats beat Patrick Ewing Georgetown Hoyas in April 1985. So with all those barrels, look, I don't think it really made much of a difference. We're still considerably higher. That is to say oil prices today than when we were when we started draining the reserve a year ago. The issue is and always has been, always shall be, is the lack of refinery capacity.

Remember, we don't put crude oil into our cars. We put gasoline. And we do not have enough infrastructure to turn crude oil from what it is to what we need. So as long as we have that chasm, there's always going to be a long term structural deficit between supply and demand. So at this point, it's a refinery issue. The demand destruction is answering the lack of supply in the market. I do want to point out we are seeing a significant pullback in futures, i.e. The paper market. The physical market, the actual price of wholesale gasoline in New York Harbor, major disconnect.

The physical price of gasoline in New York Harbor is much higher than what the futures are suggesting. That is to say because we're looking at oil-- gasoline inventories in New York Harbor at more than 10 year lows. Why am I referencing New York Harbor? That is because this is the delivery point of the NYMEX gasoline contract.

So we're looking at very low supplies, very high physical prices. Something has to give. Either the physical price of gasoline contracts to meet the price of futures, or conversely, futures rise to meet the price of the physical. And I'm going to go futures rise to meet the price of physical because that's where the real market is.

SEANA SMITH: So Stephen, we have SPR winding down. We also have the EU embargo on Russian oil coming into effect in December. If that in fact does happen, what happens then with the energy market?

STEPHEN SCHORK: At this point we're just going to continue to look in. And this is why I think we are in a short term correction, and that is to say. And based on our modeling, we're looking at oil prices well in the first half, our modeling had the upper level quartiles of 125 on the high end, 100 on the low end. And that's where we've been. We've now readjusted going into the latter half of this year.

So we've shifted with the models what we've seen recently. And we're looking at oil prices potentially as low into the $70 range. That is contingent upon if we continue to see this massive demand destruction that we're seeing. But to your point, as we go into the EU embargo and as we transition, we're in a long term structural bull market in oil.

And while I foresee, yes, oil prices potentially dipping below $80 a barrel in the near future, by the end of the year, I would suspect that these prices will be back in that $100 to $125 range, which we've seen through the first half of this year.

SEANA SMITH: All right. Stephen Schork, thanks so much for joining us.