HardAssetsInvestor

Mike Norman, HardAssetsInvestor.com (Norman): Hello everybody, and welcome to the HardAssetsInvestor.com interview series. I’m Mike Norman, your host. Well, oil prices pumping along at $40 per barrel; they had been lower, but last year was a different story. We saw them almost at $150. Here to talk about the outlook is Stephen Schork, editor of The Schork Report. Stephen, welcome back.

Stephen Schork, editor of The Schork Report (Schork): Thank you very much.

Norman: The last time you were here, we were up in the hundreds, well on our way, and I think you and I at that time said things look a little bit overdone. But what a reversal, and just for matters of disclosure, you and I had a bet.

When we got down around $100, I said it’s not going much farther beneath that, and you said, oh yes it is. I don’t think you had $40 or $35 in mind, but you won a bet, and I owe you a dinner, just so everybody knows.

Schork: I appreciate that; thank you.

Norman: A very prescient call. I don’t think anybody … the most bearish forecast, and you were one of them that I heard at the time, was maybe $65, $75 a barrel, and now we got all the way down into the lows 30s, it’s been here at $40. What’s going on, and what do you see at least for the near term?

Schork: Well, we got down to $65 simply because we were in a historic bubble, I think a once-in-a-generation bubble, with oil rising from $65 a barrel to $150 a barrel. Now when we got to $100, it was clearly in a bubble implosion, so it was very easy to make that $75, $65 call, because that’s where the bubble began.

Now it was interesting; in September, when oil was at $115, I was at OPEC, and I gave a presentation to OPEC, and in this presentation with oil well above $100, I gave them my call for $75. And I tell you, I was surprised how surprised they were that I thought it could go to $75. I thought they assumed it was going to $75, so just by the body language and the follow-up questions, it became quite clear that OPEC thought oil at $100 was the floor.

So when I came back from Vienna in September, I started lowering my calls. I didn’t think oil was going to $75, because if OPEC thought it was impossible, then I think we were going to $50, because if they thought it – everyone – and they were betting the wrong way, and when they had to exit, that exit pushed us past $65, which is where probably fair market value is in today’s market. As you know with markets, we never trade at fair market value; we swing in that pendulum, and we’ve swung all the way past fair market, and we’re all the way on the other end right now.

Norman: I want to talk OPEC for a second, but let’s just talk about the speculation. That was what we discussed last time, that contributed to the bubble on the upside. Do you think it’s a factor now in how low the price has gone, the speculation, the selling on the downside?

Schork: The selling … I think people did jump onboard, but we are now forming a base, because look, oil is $30, $40. Realistically, how much lower can we go? Can we go to $25, sub $30? In the short term, I think we can; I think demand, I think the economy is that bad; we could see it. But are going to stay down there? No.

So what we are seeing now are speculators coming into market; they’re taking huge positions in long-only commodity index funds, such as the USO. They’re making very large bets that eventually oils prices are going to rally. Unfortunately, the market is in a contango, which means prices today are cheaper than prices in the future. Every time you have to roll your position, you’re rolling into a more expensive contract; you’re actually losing money on the roll. Why these investors want to buy into a contango market and spot market is beyond me, but so is the wisdom of markets I suppose.