Oil: Biden administration cannot lower prices but can ‘embrace consumption’, analyst explains

The Schork Group Principal Stephen Schork joins Yahoo Finance Live to speak about oil prices, how China factors into the energy market, and the outlook for the oil industry in 2023.

Video transcript

SEANA SMITH: The price of oil creeping higher. After falling below $73 a barrel earlier this month, crude oil is gradually clawing back some of those gains. Both WTI and Brent now at early December highs with crude closing the day just below $82 a barrel.

We want to bring in Stephen Schork, the Schork Group principal. Stephen, it's great to see you again. Certainly the trend has been to the upside when it comes to crude prices. Where are we headed? Are we headed even higher from here?

STEPHEN SCHORK: Yes. That's where the current trend is taking us now, Seana. The narratives are winning out, the narrative being that market now is focused on China reopening. Market got a nice boost a few weeks ago when China increased by 1/5 its slated crude-oil imports for the new year. You have growing optimism out of OPEC that demand is going to stay strong.

So that narrative is winning over the other narrative. That is demand destruction vis-a-vis economic contraction here in the US with certain macroeconomic signs pointing towards recession. Be that as it may, the China narrative is winning out.

To your point, we did stumble out of the gate coming into 2023. We took a significant leg lower in the first week, and that was kind of payback for the significant leg higher we took going into the end of 2022. But we got down into the low $70s.

And here is the problem because the White House now has painted itself into a corner. They came out. They depleted the SPR, and yet heating-oil prices this winter are 58% higher. Gasoline prices for next summer are 30% higher. We've depleted the SPR. And then the White House came out and said when oil prices get back into the low $70s, we'll start buying it.

So here at the Schork Group, we're calling that the Biden put. Why would anyone want to sell oil in the low $70s or below when you know Uncle Sam is going to step in with the bid on a couple hundred million barrels? So we're looking at a de facto floor in the market at this point. So now you juxtapose that with the positive narrative of China reopening, and you do have the seeds for higher growth in price from here.

DAVE BRIGGS: Yeah, Energy Secretary Jennifer Granholm saying today that Biden has been focused on reducing energy costs. How high do you think we are headed? Are we going back above $100 a barrel, and what about the price of gas? Up $0.10 in a week. Up $0.30 in a month. How high there as well?

STEPHEN SCHORK: Right and we're going to that now part of the season where we're slow. We're looking at low inventories. So unless the secretary of energy could take some of her magic pixie dust and float it over the market and increase supplies when supplies are at extremely low levels, you can't happen-- this can't happen. So the only arsenal in this White House's quiver now has been to what? Go into the SPR.

And I've just said the SPR, it's been a nonstarter. We're just depleting our emergency supplies of oil. We depleted our forward cover by nearly 40%, and prices again are still significantly higher.

So the Biden administration has no tool that it can use to lower price. What it could do is embrace consumption. Stop demagoguing and scapegoating the industry and encourage investment and encourage these producers to come back in full force, but they've been reticent to do that. They've taken a very hawkish stance against their own domestic producers.

So this administration does not have any options at this point, hence why we're going to Saudi Arabia or going to Venezuela. We're asking them to increase production. The Biden administration-- President Biden has not stepped foot in the city of Houston to talk to producers, but we are talking to Saudi Arabia and Venezuela.

So we do not have a domestic energy policy. Regardless of what the secretary of energy wants to say, we do not have-- and hence why we do look at-- we're looking at higher prices. So right, we are now in the weakest part of the season when it comes to demand, and that is going to remain so for the next couple of weeks. So if we hold at these levels, mid $70s to mid $80s going into the late spring/summer when demand picks up, yes, we'll be looking at national gasoline prices well back above $4 a gallon, oil prices well back above $100 a barrel. That is in the cards.

SEANA SMITH: Stephen, we've also got energy earnings coming up over the next couple of weeks. We have Chevron on Friday, Exxon a week from tomorrow. What are you expecting to hear from the oil giants about the past quarter, and have we seen a peak, at least for this cycle?

STEPHEN SCHORK: The crack spreads have been great. That is to say the differential between the product price, what the refinery is selling, and the crude-oil price, what the refinery is buying. So that margin, that spread called the crack spread, has been very attractive, and I would suspect that it certainly will help continue to propel profits higher for the most part.

So if we're going into the season-- and certainly, again, we're at that weakest part of the season. But the market from the margins, the spreads have only been increasing. And again, this here is a clear telltale of a lack of supply in this market. That is to say the forward curve-- prices on the forward curve are much higher than prices later dated out further out along the curve. This is a clear telltale that demand is outstripping supply, and the spreads are telling this. And if demand is outstripping supply and if you are producing that supply, selling in that demand market, that's a very attractive area to be in right now.

SEANA SMITH: We'll be paying very close attention to those earnings reports. Stephen Schork, thanks so much.