Wall Street has fallen back in love with oil: Expert

The Schork Report Editor Stephen Schork joins Yahoo Finance’s Zack Guzman to discuss the latest outlook for oil and gas ahead of the upcoming OPEC+ meeting.

Video Transcript

ZACK GUZMAN: Let's check oil because we're seeing prices there and the price of crude here surging more than 5% to wrap up for the week, approaching $40 a barrel, which is kind of crazy to think when you think about just the headlines a few weeks ago when we were talking about negative oil prices. Of course, this weekend, we're going to be getting a pretty important meeting with Russia saying that OPEC-Plus will be having that expedited meeting tomorrow to discuss output curbs and what could happen on that front, as well as it all becoming-- as we're seeing production here in the US move down as well.

So what's really going on as we see supply and demand shifting-- want to bring on our next guest, who called oil's collapse just a few weeks ago and now joins us to discuss where we go from here, Stephen Schork, "The Schork Report" editor-- always good to chat with you again. When we look at this, what's your take on how all this is happening so quickly when we think about the rebound in crude now sitting back at 40%-- or $40 a barrel? Where do we go from here?

STEPHEN SCHORK: Right. So what really caught the market, Zack, off guard was how quickly United States producers reacted to the downtrend. Typically, when we're talking about pulling production off the market-- is usually done by Saudi Arabia or Russia or one of the other larger OPEC members.

Now, this is a consensus among members that you have to have a meeting. You have to agree to the cut. Then you have to allow for a date to implement the cut. So there's an extreme lag of OPEC's ability and, thereby, extension-- Russia's ability to react to price.

With the United States, you have private oil companies, shale producers, that are much more vulnerable or sensitive to prices. So when we saw the significant downturn in price, which began in February and was, of course, exacerbated in March and then into April, shale producers reacted immediately. So over the past three months, US shale producers, in concert with other major producers in the United States, were able to take 2 million barrels a day of production out of the market. So that was much quicker than what the market was anticipating. So we've had a significant reaction by US supplies to this price move.

So what has happened now, Zack, as it appears, is that Wall Street has now fallen back in love with oil. So over the past two months, hedge funds in particular have increased their buying interest in oil to a two-year high. So it's speculators that are really driving this price higher. There are still some fundamental concerns with regard to the market. But right now, what's driving the market was the quick reaction by US producers to pull oil off of the market and hedge funds' love of owning this market right now.

ZACK GUZMAN: Well, let's dig deeper then into those fundamentals because you talk about how that could be going on. But when we talk about the supply and demand issues here, obviously, one could watch these moves and say, oh, clearly, demand is coming back as the economies are starting to reopen. That would be one thing.

But then also, as you talked about last time we were chatting, the actual real problem of storage capacity in this country approaching its limits-- and that's why we saw oil dip into the negative last month. So when you look at that, what has been the trend lines there as economies start to reopen, maybe people start driving a little bit more? How has that all shifted recently?

STEPHEN SCHORK: Well, certainly, the biggest shift has been on the capacity issue because the main driver, which was what drove oil prices negative two months ago, was the lack of storage capacity of where you make and take delivery of the NYMEX crude oil contract in Oklahoma. Since then, 23 million barrels of space has been leased by the United States government to private oil companies to rent space in the Strategic Petroleum Reserve.

So over the past five, six weeks, we've seen about 13 million barrels that otherwise would have had to gone into commercial storage or consumed has now gone into the government, as these companies rent this space. So that has greatly reduced the capacity strains on the market. And it's taking a big bearish driver out of the market.

Now, with regard to demand, yes, some of the protocols with regard to COVID have been lifted. Gasoline demand destruction has bottomed. Gasoline consumption, that is to say, will start to increase, but at extremely low levels relative to normal.

So as I said before, Zack, US producers did respond. We have taken 2 million barrels a day of production out of the market. But our refineries, Zack, are burning 3 to 4 million barrels fewer than normal at this point. So even though we've taken 2 million barrels of production out of the market, refineries are consuming 3 to 4 million barrels, fewer barrels.

So we still have a situation where demand destruction is outpacing supply deconstruction. So as we go into the summer now, what we're looking at here is a market where, yes, demand will begin to pick up. But now, with shale, with oil prices, WTI price, approaching that $40 a barrel, well, we know from a survey by the Dallas Fed that shale producers need a price as low as $23 a barrel in certain place in Texas to as high as $35 a barrel in other place.

So with oil at near $40 a barrel, we now have oil prices high enough to keep production level. That is to say, producers say they need to see around, on average, $30, $31 a barrel to keep production or keep existing wells operating. So now that we're close to $40, what we can expect to see, this pullback in production-- that's going to end now. So we've bottomed, or we will bottom over the next couple weeks as far as supply deconstruction.

So as we go ahead, it's going to be a race. Can demand increase greater than what shale producers are now on the cusp of adding back to the market? I venture no at this point because the demand destruction relative-- I know we had a great unemployment number today, "great." But I'm a little skeptical on that.

We'll see where we are two months hence. But that said, I'm still concerned about the overall economy and demand. And now I'm concerned that shale producers are going to start putting more oil back onto the market.

ZACK GUZMAN: Well, let's wrap this up. Then we'll put a pin on the actual call here because last time, I crowned you the "Oracle of Oil." And I know it's not easy to say where we're going to go here when we talk about the big question mark of tomorrow's OPEC-Plus meeting and what cuts would need to happen to support $40 oil here.

As you said, producers likely to know that the US here is going to be in the green with it at $40-- so what's your take on what number we'd need to see here to support oil's continued rise or what might happen in that meeting to push us lower? Where does the actual price go? Caveat that one for us.

STEPHEN SCHORK: Yeah. Absolutely. I think the market is clearly gambling on OPEC cutting production or extending the production cuts. I'm a little skeptical on that because OPEC is going to look at the shale producers. And you've had a number of shale producers this week-- have already announced they're bringing production back. This is not something that Saudi Arabia or Russia are going to want to see.

So it's going to be really interesting to see. But the market is clearly betting an extension of these production cuts. If we do not get those cuts and if OPEC decides to put more oil onto the market or clearly signal that they're ready to do that, then we're clearly near the peak of this rally in oil prices.

I will venture that when we collapsed, prices collapse in the beginning of March, we had a major gap from about $41, $42. It's about $32 in that price gap. Markets abhor a gap. So I can see us moving higher to close that gap, which was established back in March-- so $42, $43 a barrel.

Without an extension of these cuts, I am hard-pressed to see oil prices moving higher beyond that. And I would expect to see a retracement back down into the mid- to low $30 range.

ZACK GUZMAN: All right. We'll keep our eyes on that as well as the meeting tomorrow. But as always, I appreciate the insight, Stephen Schork, editor at "The Schork Report."