"There is no demand" for oil because economies around the world are dead: Schork

The Schork Report Editor’s Stephen Schork joins Yahoo Finance’s Zack Guzman to discuss oil prices, after President Trump tweeted he expects Saudi Arabia and Russia to cut back "approximately 10 Million Barrels."

Video Transcript

STEPHEN SCHORK: $25 a barrel is where we're currently trading. Outside of the Eagle Ford in Southwest Texas, oil prices are still well below the operating costs of existing drills. So this is a tweet, it is rather meaningless. We still have a situation based on yesterday's report from the EIA. The United States is producing too much crude oil. Our exports are non-competitive, they're too expensive, and we are now bidding oil into storage. So by the 4th of July holiday, every available spot of storage capacity, free tankage, now will be at max constraint.

So now as demand continues to dwindle, what, 6.7 million last week, 3.5 million two weeks ago, 10 million people filed for unemployment in just the past two weeks alone, we're looking at potential 60 million people unemployed before this is all said and done. So we can tweet all we want about production cuts. It is a demand story. And right now, there is no-- no demand because we have killed our economy. Europe has killed its economy. Asia has killed its economy. So these economies are dead. There is no demand.

And there is no demand-- oil today is trading 10%, 20%, 30%, in some cases, 40% lower today than if you priced it out a year from now. So what does that mean? We're going to be bidding, and we're going to put a lot of oil into storage. Even though I don't care how much oil we pull off, we're going to be at constraint by the 4th of July holiday, meaning that there's going to be no place to put excess oil, and the demand is not there. So this is still a very long-term bearish scenario in this market.

ZACK GUZMAN: Yeah, I mean, you raise a lot of good points. So obviously, the president kind of had raised-- he kind of shifted his tune when you think about how he was celebrating the drop in oil and-- and kind of putting it out there that gas prices for consumers were going to be going down, which is good on that front, but not if you don't have people out driving right now because of lockdown orders.

And the fact that, you know, that the US has become a net oil exporter, you would think that it would be a larger impact to the economy here to have lower oil prices, which is something that's crazy to think about even just 10 years ago. But when you look through that, if you put all the pieces together, what does that mean for you in terms of telling a story of, even if you do get this agreement that he's talking about here, what-- what happens to some of these oil companies here in the US that cannot continue operating with oil prices near 20?

STEPHEN SCHORK: No, absolutely not. It seems $23 a barrel, which is a survey that the Dallas Fed put out recently, is the rock bottom just to keep current drills open. You're going to need oil back around $49, $50, $55 a barrel to entice profits for these companies. So earlier this week, Whiting Petroleum, which at one point was the largest producer in the Bakken up in North Dakota, filed for bankruptcy. That's the first domino. So you're going to see a considerable amount of dominoes falling over the next few years, as these oil [? EPs ?] with some of the lighter balance sheets have to end up closing shop.

So you also picked up, you know, one-- one of my pet peeves about low gasoline prices. Everyone seems to think that low gasoline prices in-- in the greater scheme of things are good, and they're not because commodity prices do not drive economic growth. Economic growth drives commodity prices. So when you have a major crash in oil, in copper, in alumina, in any industrial commodity, that is not a good thing. That is a leading indicator to say that there is a lot of economic hardship not in the too distant future. So with this pullback in gasoline prices, yes, gasoline prices are going below $1 a gallon.

Two weeks ago on the NYMEX, gasoline traded within $0.37 of zero. So you have that lack of demand. So as we continue to produce-- and I know Trump is talking about, you know, these tweets about pulling production-- it's not enough without the other side of the equation, the demand side. So a very tough row to hoe over the next few months, because keep in mind, we still don't know how long we're going to be shelter in place. They keep on kicking the can down the road. It seems every two weeks that they're going to extend it. We still don't know the impact of this virus. And with that big unknown out there, you cannot be bullish on this market.

HEIDI CHUNG: Hey, Stephen, it's Heidi Chung here. So I want to talk more just about the energy sector and specifically energy stocks here. You know, it's been underperforming for quite some time. And then coming into 2020, we had so many analysts say, this is it, this is the year for energy. That certainly was not the case, looking at it in hindsight. But that being said, what do you do as an investor that's already exposed to energy? Do you pull out now? Or do you see any bright spots within the sector?

STEPHEN SCHORK: Well, no, I don't see any bright spots through the sector at this point. And-- and as you said, there was a lot of bullishness on the energy sector, and I never quite got it. Because even if we never had the coronavirus, what we do know is that the industrial side of the US economy has been in recession for about the past four months, this virus aside, so hence why we had such poor demand, commercial industrial demand for energy itself.

Going forward now, again, if you're going to play-- if you're in the energy space, you want to be in the energy space that has more exposure to natural gas and petrochemicals. Crude oil market is a-- is a sunset market at-- at this point, hence why the-- when we looked at the Saudi IPO, that was 10 years too late with that IPO. We are not a crude oil-based economy going forward. That was changing already. As the new generation, as they mature, we're going to be more of a natural gas petrochemical-based company.

So you're looking at companies from an investment standpoint that has exposure to infrastructure, getting the gas out from where it is being produced, mainly here in Pennsylvania, West Virginia, Ohio, and getting it to where it's going to be consumed. The burgeoning Ohio petrochemical market is an area. There's also, of course, the export markets down in the Houston-New Orleans area that-- that are excellent investment opportunities going forward. And in the-- in the nearby, you're going to be able to pick up these assets on the cheap. [INAUDIBLE] bankruptcies.

ZACK GUZMAN: Yeah, and that's the big question right now is, which one is going to follow when we look at Whiting, and what could happen next? But before we let you go, I just want to dig into kind of your last price expectation here because you had nailed the calls we talked about going from 40 to 20. And now, I mean, you had a note out saying that we could go-- the last time you were on the show you said we could go down below 10, and then you were even talking about potentially going all the way to zero.

I mean, what exactly, since it doesn't sound like you're really bullish on the idea that even if we do get a deal, demand is still going to be an issue, how about the flip side? How bad could things get? And how sure are you that we could go to zero if we don't get that deal, we still see demand falling? I mean, what is the actual chance of that?

STEPHEN SCHORK: Well, in-- in some North American oil markets, we already are below zero. Oil-- asphalt sour crude oil in Wyoming traded below zero. We're likely headed for below zero in Canada because the Canadians, because of the-- the engineering of their production, they cannot shut down production, so the Canadians are going to have to pay people to take away their excess production.

So therefore, we will see, we have and we will continue to see, negative prices. We're already seeing single digit prices for sweet oil out in West-- or, low double digits, $11, $12 a barrel, for sweet Texas out in Midland in the Permian. So the all-time record, Zack, $9.75. That was April 1986. There's no reason to think that we cannot set a new record, so oil below $9.75 before this is all said and done.

ZACK GUZMAN: All right, sticking by it. A very bearish call, but he brings the truth. Stephen Schork, appreciate it. Thanks again for joining us, my friend.

STEPHEN SCHORK: Thank you, Zack.