Oil is trading higher after Saudi Arabia plans to cut 1 million barrels a day of crude production in February. Stephen Schork, The Schork Report Editor joins Yahoo Finance Live to discuss.
ZACK GUZMAN: Welcome back to "Yahoo Finance Live." I want to spotlight the movements we're seeing play out in the oil market as crude just broke above $50 a barrel for the first time since the pandemic began. That was boosted by a surprise 1 million barrel per day production cut from Saudi Arabia that will begin in February as well as OPEC plus has moved to hold output steady here. The EIA also showed that inventory for the prior week decreased by about 8 million barrels as well. Analysts there were expecting a bit of a drop, too. So where does the price of oil go here in 2021 considering the fact that we are seeing supply constrained, but big questions around demand?
Our next guest was able to nail a lot of price calls in 2020 as well as 2019. That, of course, would be the man I like to call "the oracle of oil," Stephen Schork. The editor of the "Schork Report" joins us right now. And, Mr. Schork, I mean, there's a lot of factors to play into this. Goldman Sachs seems to think the demand is going to be slowly recovering here this year, but where do you see the price of crude going if we are going to maybe see supply continue to be constrained, but the demand seems to be a larger side of the equation that people yet haven't figured out?
STEPHEN SCHORK: Yes, absolutely. Now, we have to keep in mind that oil prices are still well below where we were back in January. In fact, we ended 2019 on a very strong note, and we began 2020 on a very strong note, but by the end of January, early February-- and keep in mind, this was before COVID-19 worked its way into the vocabulary of most people around the globe-- oil prices were already starting to show considerable weakness. And then, of course, prices collapsed-- March, April, and into the summer as demand collapsed because of COVID. We've since recovered from that, but, again, we're still below where we were last January. So we still have a ways to go at this point.
Now, more importantly, what we've seen over the past month are stronger fundamentals are clearly getting priced into the market. That is to say, when we look at the forward curve, last month we saw the spot price of crude oil trade above the contract 13 months out. That's a very key indicator. Any time you've got spot prices moving to a premium to a longer dated contract, clearly there is concern that demand is outweighing supply.
So, yes, we have come through a very strong rally through, well, through December into the new year. But I venture-- this is all based on demand-- that we are, once we get into that mid-$50 range-- you're gonna see considerable hedging by producers. Because this is a very attractive level for them to bring more production-- and that, of course, I'm talking about the North American producer-- 50 and above, you're going to see increased production coming out of the US oil patch. And that should help cap prices in that mid-$50 range through at least the first six months of this year.
- If we're talking about increased production, at least here in North America, what kind of timeline are we talking about right now? I mean, you point to demands, or that indicator pointing to demand, outpacing supply. And yet here we are still talking about some very strong or strict restrictions in place as a result of this most recent surge.
STEPHEN SCHORK: Yeah, absolutely. So what we're looking at now is demand is going to recover. I mean, look where we were back in the second and third quarter. Demand has no way to go but higher at this point. But from a historical standpoint, given the lockdowns-- and let's keep in mind the elasticities of demand have greatly changed-- the market is much more responsive to price action than it had been prior to the advent of substitutes in the market. And, of course, I'm talking about EVs.
Now, when we talk about that venture, we're looking at a structural change in the market. We're actually looking at peak oil demand as we move more towards electric vehicles. So we're not going to see the normal recovery that you would expect in oil prices because we are now moving away from oil. And, of course, this move was hastened by the demand destruction that we saw through last year. So, you know, at this point, demand's rising, but, you know, there's going to be a cap going ahead into the first six months.
ZACK GUZMAN: Yeah. And, I mean, especially considering the Biden administration and what we're seeing come through there as well, but it sounds like you're saying $55 remains the upside cap there?
STEPHEN SCHORK: Yes.
ZACK GUZMAN: Outside of the oil market, though, I'd be interested to get your take on natural gas because that's another part of the market you've covered for quite some time. And interesting to see Bill Gross talking about natural gas in his investment outlook letter yesterday. He was saying that his "favorite market sector is the natural gas pipeline group, with yields between 9% and 12% for investment grade stocks with certain tax advantages." He pointed out a few-- Magellan Midstream Partners, BP Midstream, and Enterprise Products-- as some of his favorite picks there. When you look into the natural gas part of the market here, Mr. Schork, give me your take on maybe what he's saying there and what it looks like in terms of maybe those names in 2021.
STEPHEN SCHORK: Yeah, absolutely. And it's all about supply and demand, whether we're talking about inventories or whether we're talking about pipeline capacity. Now, with the new administration coming in, based on their rhetoric, based on their official platform in the DNC, it's not going to be friendly to the hydrocarbon economy. Therefore, they're going to violate the number one tenet of finance. That is to say, capital goes where it's welcomed, stays where it is well treated. And by all indications, capital is not going to be welcomed in the hydrocarbon space. And certainly, the capitals, they're not going to be well treated.
So we're gonna be looking at a pullback in investment flows into this sector, which will, of course, impede the growth of capacity for natural gas. Now, the United States is on the verge of being a major natural gas exporter-- tremendous demand in Asia, tremendous demand in Europe for US gas. Now, there's an inability or lack thereof to get enough gas to the market. So whatever capacity does exist, there's going to be high demand to transport gas on that capacity. And therefore, it is a very bullish outlook, not necessarily for price, but certainly for pipeline capacity in the new year, and I'd venture through the next four years of this administration.
ZACK GUZMAN: So it sounds like you'd would be agreeing with some of the idea or thinking around those existing players, those ones. It would be a smart play if natural gas is gonna see the same demand you're expecting here for the year.
STEPHEN SCHORK: Yeah, absolutely. They're already well positioned. They've been beaten down over the last few years. So there's tremendous value there. And we're really on the cusp of a change in the market as we transition away from oil in the years ahead more towards natural gas. And once again, as that demand for gas grows, there's going to be demand to transport that gas from where it is in my home state of Pennsylvania, Eastern Ohio, Northern West Virginia, and so forth, to get that to the export markets. And there's a limit to how much gas can flow because of this constricted capacity. So therefore, again, supply and demand. You have tremendous demand for natural gas. You have the limited supply to move that gas. Hence, the y-axis price has to go up and follow suit.
- Stephen Schork, [INAUDIBLE] "Schork Report," always good to [AUDIO OUT]. Thanks so much for your time.