Gas prices: ‘We’re looking at a potential 40-45 cent increase’ by summer, Stephen Schork says
The Schork Group Principal Stephen Schork joins Yahoo Finance Live to discuss the energy market, U.S. gas prices, and the factors contributing to rising oil prices.
- Another volatile day in the oil pits. We've got crude oil now hitting a fresh seven year high. Jared Blikre is here with a recap for us. Jared?
JARED BILKRE: That's right. WTI futures for February settlement, they just closed at $86.96 per barrel. Haven't seen anything like that since October of 2014.
Let's go to the Wi-Fi interactive, where we can see our commodities heat map has a lot of green on it. Some of the biggest gainers today are in metals, but we're here for the oil close. So let's take a look at crude oil, up about 1.5%.
I like showing this three month chart so you can see the considerable rise we've had since the beginning of December, wiping out those losses from Omicron and just building on them. There's going to be a lot of concern about energy prices this year, because it is an election year. Midterm elections get swung by energy prices. So it really puts pressure on the Fed in terms of inflation. And while energy is flagging today as a sector-- you can see most of these stocks in the red-- they have had a banner year.
In fact, let's take a look at the 12 day performance. You can see Exxon already up 20% on the year, so is ConocoPhillips and British Petroleum. Some of these guys up even more. Halliburton up over 23%, and Occidental Petroleum just a little bit more. So energy still in the driver's seat for the year, but flagging a little bit today.
- All right, I'm going to bounce off that driving situation, and talk about the bumpy ride it's been for drivers this year. According to AAA the average price for a gallon of regular unleaded $3.31. That's up more than a penny from the prior week. And experts are warning there could be more pain ahead at the pump this spring. Here with his outlook on gas prices and the overall energy market is Stephen Schork, the Schork Group principal.
So Stephen, how high are we talking here? How do you see gas prices going? Could we have a national average well above $4 a gallon come springtime?
STEPHEN SCHORK: Well, it's trending that way. We have to keep in mind that what we're consuming now, in the United States at the retail level, is, quote unquote, "winter grade" gasoline. This is a gasoline where the feedstocks that go in to make it are abundant, therefore cheap relative to other feedstocks later in the year. So we're now consuming the cheapest manufactured gasoline of the year.
As we roll into next month, and as we get into the spring and then this summer, we begin to transition over to what is called summer grade gasoline. This gasoline is much more expensive to manufacture, so just from that standpoint alone we're looking at probably a $0.20 to $0.25 increase when we roll over to these newer fuels. Now, when you factor in where crude oil prices are and where they're likely going, we're forecasting in our modeling a 13% probability that oil will be above $100 a barrel by the start of the summer, which would add another $0.20 to the average price. So when we take into account the rollover in the specifications for gasoline $0.20, and the potential 13% that will be over $100, we're looking at a potential $0.40 to $0.45 increase in gasoline prices as we get ready to head to our summer vacations.
- Hey Stephen, it's Karina. Thanks so much for coming on. So look, it's primarily the Fed's job to try and rein in inflation, right?
But these are unprecedented times, so the White House has stepped in. They've opened up the strategic reserves. And that did very little to help lower the price of gas. They did it just before the holidays to try to appease consumers.
But has the administration done enough? And what more can they do? They can't just, you know-- can they just ring up OPEC and say, open the spigot a little bit more?
STEPHEN SCHORK: Absolutely not. And the White House is doing everything they can to keep and propel oil prices higher. The SPR was a political stunt.
We have to keep in mind that the SPR was not created to manipulate gasoline prices. It was created in the wake of the 1973 Arab oil embargo to mitigate a short term unforeseen disruption in the supply of crude oil, that's not the case.
So the SPR was never designed to manipulate price, because when we look at the global demand of oil, 50 million barrels is nothing. It's a drop in the hat. Therefore, since the SPR was not designed to manipulate prices, the decision by the White House was bound to fail, as we noted at the time. We did get a significant sell off the Friday after Thanksgiving, when that decision was made. But we rallied 40% since those lows.
So what can the administration do? They can throw out an olive branch to the industry, because based on their DNC-- the platform, before Mr. Biden was elected president, they made it quite clear they wanted to violate, in the energy market, the first law of economics, and that is capital goes where it is welcomed and stays where it is well treated. And the move to go away from oil has sent a clear signal to the industry that investment should not be made or should be limited.
So when we factor in the wrong message that the White House is sending to the industry, and then we couple that with the inflation-- for instance, the PPI numbers from last week showed us that domestic crude oil producers were paid an extra 50% year over year, because of rising inflation. So the cost to produce, the cost to manufacture ethanol, a key feedstock in gasoline, has more than doubled year over year because of inflation. So yes, inflation is a driver.
But the White House is sending out the wrong signals. Stay away from political gimmicks like the SPR, and send out an olive branch and induce the industry to invest in future production, because we're standing right now production is not able, and will not be able through the 2023, to offset rising demand. So get ready. We are looking at higher oil prices longer than anyone had anticipated six, seven, eight months ago.
- But Steven, what about the idea that about a dozen congressional Democrats had, and that was their urging President Biden to ban US oil exports. Does that have the chance of perhaps backfiring and working out pretty badly for the oil markets?
STEPHEN SCHORK: Oh, absolutely. That proposal is economic ignorance on stilts, because we have to keep in mind the United States produces a very high quality oil. That is to say it's very easy to refine. Therefore, it trades at a premium. United States, the majority of our refineries are engineered to process a heavier, sour grade of crude oil, which is harder to manufacture, and, therefore, it is cheaper.
So the United States is in the enviable position of exporting our high priced oil. We're exporting caviar, and then we buy back the oil that we don't necessarily produce. We're buying back tuna fish at a discount.
So if you just clog up, and we maintain that high quality oil here in the United States, hey, that's great. But guess what? US refineries can't use it.
And it absolutely will backfire, because you will prevent the United States from buying that cheaper oil, which would then trade at a premium, because we are embargoing our own exports. And yes, of course, it will absolutely backfire. And it will only drive oil prices further higher.
- Stephen, not much time left only about 30 seconds. How much of a threat do geopolitical tensions pose, particularly in the Persian Gulf? We know Iran, and then now with the Ukraine and Russia border.
STEPHEN SCHORK: Yeah, absolutely. The Russian-Ukraine border has more of a natural gas story. But that said, because of extremely high natural gas prices, we're seeing natural gas to oil switching, which is increasing demand for oil. So that geopolitics is a plus, a positive, bullish indicator for oil. And of course, as of what we're seeing with just the rebel attack, the Houthis over the weekend on an oil tanker in the Gulf. So those geopolitics are coming into the fore.
I have it on a good source that the Iranians are now investing back into dollars, devaluing their currency. This is an implicit tell that the Iranians are expecting to reach a deal with the White House, which could help soothe what is right now a raging oil market. But that said, currently we're seeing too much demand, not enough supply making to the market. And we have a scenario for higher oil prices well into the summer, and into next year.
- All right, you heard it here drivers, brace for those higher prices in the weeks and months ahead. Stephen Schork, the Schork group principal, thanks for your perspective today.