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Oil prices signal that 'there is still economic trouble on the horizon': Stephen Schork

Stephen Schork, Editor of The Schork Report, joins Yahoo Finance’s Zack Guzman to discuss how Hurricane Delta could impact the energy market.

Video Transcript

ZACK GUZMAN: But first, I want to kick off the show with that hurricane news in the Gulf. We brought it to you yesterday about the overall trend of strengthening storms. Of course, Hurricane Delta comes just six weeks after the region got battered by another hurricane, a stronger one in category 4.

But still, we are seeing the same preparation work being carried out down there, as we are seeing winds in this storm hit 115 miles per hour. So even though it's weaker than Laura, it's still a very strong storm. And swells are expected to hit 11 feet later on today when that storm makes landfall.

It, of course, is impacting the Gulf's oil production activity as well. Nearly 1.5 million barrels of daily output has been halted so far. And that's boosted prices. WTI here has seen gains of about 10% this week. This was the first rise we've seen in the last three weeks as prices rallied in response to that change here in production, as well as Norwegian oil workers also taking strike action.

So where do we go from here is the question on investors' minds. And here to break that down for us is our first guest. Stephen Schork is the editor of "The Schork Report," and he joins us now. And Mr. Schork, it's good to see you again.

I mean, put this into context for us because we obviously went through this, as I said, just about six weeks ago in looking at the market size of how big of an impact this is, and as we've been discussing supply and demand issues right now. So talk to me about how big this particular storm is for the oil market.

STEPHEN SCHORK: Now in the greatest scheme of things, Zack, it's much smaller than it was back in 2005 when we had, up until that point, the most active hurricane season in the Atlantic basin and, of course, the Gulf of Mexico. Oil and gas production was decimated at this time 15 years ago with, of course, Hurricane Katrina, and then Hurricane Rita four weeks later.

So we've seen this script before. Now the big difference between now and 2005 is, the United States was much more dependent on imports of crude oil. Therefore, when you have hurricanes, you have a disruption to vessel traffic, so your imports are cut off. And we were also much more reliant on natural gas production out of the Gulf of Mexico.

Now 15 years later, we're not nearly as dependent on the Gulf of Mexico for either imports or natural gas production. So therefore, yes, 15%-- excuse me, more than 90% of Gulf of Mexico oil production is currently shut in for a precaution. But that only represents 15% of US production, and it's short-lived. Production will be back up in another week.

So the typical playbook for a hurricane is low oil, high products. After all, we have refineries. Gulf of Mexico-- the Gulf Coast is the refinery epicenter of the United States. Fewer barrels of crude oil going into the refinery because they're shut down, fewer barrels of gasoline this lets come out.

So this typically tends to be a bullish phenomena for products and a bearish one for crude oil. And in fact, products are what is leading the market higher this week, kind of dragging crude oil up along with the ride.

ZACK GUZMAN: Yeah, and you talk about that on the supply side and in terms of putting it into context for us and how small of a percentage you're talking about in terms of US production.

But looking at the global demand on the other side of the equation, because we've been talking a lot about what the pandemic has done to push demand lower, and that trend doesn't really seem to be going away, at least when you ask people like yourself, who might not have a vested interest in this.

But that's not necessarily what we're hearing from OPEC. Of course, OPEC security general coming out yesterday and saying that the worst was over for the oil market. What's your take on that and where demand looks to be going from here?

STEPHEN SCHORK: Well, I think OPEC is a good degree of wishful thinking with regard to demand destruction. At this point, we're seeing a resurgence in infections in Europe. And certainly, we've seen renewed outbreaks here in the United States. So we're looking at the specter of another potential global shut-in of economic activity.

So, of course, that's already destroyed demand this year. And in fact, crude oil demand this summer was 17% lower here in the United States. So that's 17% or about 2.8 million barrels a day of crude oil that was not consumed, effectively putting 550 million barrels of crude oil onto the market that should have been consumed.

And that's only here in the United States. And as we said, to your point with regard to economic growth in Europe and so forth, it seems that everyone is betting on stimulus. Stimulus is, we're just dropping money on to the economy. That's not growth. That's not economic growth.

And it's being reflected, I believe, in the commodity space. Commodity prices, of course, are I think the best leading indicator for economic activity. And we're looking at oil that is range bound. In fact, over the past two weeks, we've traded every single day below $40 a barrel.

We're getting a little bit of a boost now, but oil in the high 30s, low 40s simply isn't going to get it done. And it is a clear telltale that there is still economic trouble on the horizon.

ZACK GUZMAN: Yeah, and it seems as if that's really been the range-- that is the range we've been bouncing around. And I assume that's what your call would be, would be to see us continue to move in this kind of $36 to $42 range and continue to just trade around that.

But since you did put into context kind of US production here, obviously, one of the biggest things that we've heard on the campaign trail of the debate stages so far has been fracking.

And of course, we keep hearing from President Trump, or VP Mike Pence, that Democrats will move to ban fracking. That has not been their position, at least Joe Biden's stated position. Looking to maybe do that on federal lands-- that does seem to be his position here.

But when you look at fracking activity, about 90% is on private property. So it wouldn't seem to impact things that much. So talk to me about fracking and what that could do to change, I guess, oil and natural gas output here when we think about what could happen in 2021.

STEPHEN SCHORK: Yeah, absolutely. The biggest fear, as far as I'm concerned, with regard to fracking is not what candidate Biden is saying at the moment. It's what he and all of the Democrats were saying during the convention. And Biden was quite clear that he wanted to outlaw-- he wanted to ban fracking.

Now, of course, he's made the pivot. Pennsylvania here is a key state for the parties. And he's making a strong pitch in western Pennsylvania that he's not going to ban fracking or natural gas production. I suggest and I certainly recommend to all viewers, read the DNC's official platform.

Because as you alluded to, Zack, that in the platform, they are going to outlaw fracking and drilling on all federal lands. Now that might be a small percentage. But we also have to keep in mind the key tenet in finance. And that is capital goes where it is welcomed, and it stays where it is well treated.

And clearly, a Biden presidency is a clear indication that capital is not welcome in the hydrocarbon economy. And it will not be well treated. So what we would expect is not necessarily higher or lower prices. But we would suspect, as that money well dries up, increased volatility in markets, as production and transportation markets are challenged by the lack of capital coming into this market potentially over the next four years.

ZACK GUZMAN: All right, Stephen Schork, he's been right on oil so far. That's why we like having you back. Appreciate you bringing us your latest thoughts there. Stephen Schork, "The Schork" editor-- "The Schork Report" editor, appreciate that.