HardAssetsInvestor

Written by Lara Crigger  |

November 10, 2009

Stephen Schork: More Upside In Oil

Details

The editor of The Schork Report shares his thoughts on the current state of the energy markets.

• Will the oil contango continue?
• China vs. the ‘idea of China’
• The importance of political peak oil

Is oil entering a bubble? That was the question on everyone's mind at last week's "Inside Commodities" conference, where keynote speaker Nouriel Roubini argued in his speech that oil prices had risen too far, too fast, too soon.

But oil can still go much higher, says Stephen Schork, editor of The Schork Report, a daily briefing on the energy markets. With over 17 years' experience in commodities trading and risk systems modeling, Mr. Schork is a highly respected voice in the energy markets, and has offered his expert opinion to CNBC, the Wall Street Journal, Bloomberg and dozens of other media outlets.

While at the conference, HAI Associate Editor Lara Crigger chatted with Mr. Schork about his thoughts on the current energy picture, including whether oil prices have gotten out of whack with fundamentals, whether natural gas or oil has more upside potential, and why geological peak oil isn't as important as political peak oil.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): In 2009, oil went from $35/barrel back up to $70-$80 in relatively short order. Have oil prices gone higher than the fundamentals justify?

Stephen Schork, editor, The Schork Report (Schork): What is oil's value? It's what we derive from it, and what we're consuming. Certainly on the consumer level, I think we're seeing a rise in appetite, and a rise in the elasticity of demand.

So at this point, if we look at the cost of taking oil out of the ground, and what the Saudis (or any other government) are setting their budgets at, then I think fair market value is three times that. Petrobras has said that at oil at $55-$65/barrel, they'd be tickled pink - so, really, anything above this, I think.

Crigger: Throughout 2009, we've seen the energy markets suffering from contango. Will this contango persist through 2010?

Schork: If we don't see a rise in demand, absolutely. That contango's been in place for awhile, and you will not see an increase from contango until you see actual demand for crude oil.

I would expect to see demand rise by the spring. If things tighten up in the spring with regard to product inventories, that would be the time that you'd want to look for. With rising demand and falling product, I'd expect that contango to invert toward backwardation.

Crigger: In your opinion, which has more upside potential for 2010: natural gas or crude oil?

Schork: At this point, I'd still have to say oil. With regard to natural gas, we're seeing the advent of nonconventional sources of gas: coal-bed methane, shale and so on. In the industrial complex, which is a major consumer (the steel industries mainly, and the metals producers, plus your fertilizer and chemical industries), I think production remains pretty weak through 2010. And given the amount of LNG already on the market, and that which is coming onto the market, I think that's going to help to continue to push natural gas prices down.

On the other hand, oil prices - especially in the U.S. - are less due to industrial consumers and more due to transportation. So I still think the upside's more toward the oil side at this point.

Crigger: There's a lot of discussion lately on this idea of peak oil, and how that affects supply and demand for oil. What are your thoughts?

Schork: I don't believe in it at all.

Crigger: Not at all?

Schork: Well, I believe there's political peak oil. I believe there may not be the will to extract. But as far as actually extracting the oil from the ground - look, if you incorporate the entire mass of the Earth, we've scratched 1/15 billionth of its surface.

So if you drive prices up to $100 oil, sure enough, you do find that oil in the Tupi field and so on. Surprise, surprise. All of a sudden, you start finding oil again.

And we haven't even touched the east coast of Africa. Forget the west coast, which still has a lot more to find. We haven't even gone near the east coast, and there's speculation that a lot more is there.

So putting the politics aside, I don't believe we have geological peak oil. But put the politics in, and you can get political peak oil.