Navigating the Oil Market: Insights on Prices and Supply Chain Disruptions

Well, in New York Morning Trade, we are looking at oil prices little change.

The May contract for WTI is pulling back nearly 0.9%, while the June contract for WTI is off half a percent.

Meanwhile, we're looking at Brent prices right around the $95 level.

Now, this does come as President Trump does predict a deal with Iran before the ceasefire expires.

And as we continue to look at the Middle East, as well as monitor the situation and the uncertainty, the oil market has fractured in two.

On the screen, traders are pricing in a resolution, keeping paper contracts somewhat restrained.

But in the real world, the physical market is concerned.

This weekend's fresh wave of hostility wiping out last Friday's market optimism with Tehran briefly declared the Strait of Hormuz open to commercial traffic.

And while off its April peak, oil is still trading roughly 34 percent higher than before the U.S. and Israel conflict began in late February.

Well, joining us to weigh in is Stephen Schork, co-founder of The Schork Group.

Well, Stephen, good morning.

Thank you so much for joining us.

So, a lot of moving parts here to consider and still a lot of uncertainty about the meeting set to take place in Tehran.

But With the clock ticking in the nation's capital, Trump says the ceasefire will likely expire on Wednesday.

So if talks don't work out, they do collapse and the Hormuz does remain threatened.

What are the key technical upside targets that you are watching for oil futures?

Yeah, absolutely.

So there seems to be this really interesting discussion about how high oil prices can go.

Can they go to $120?

Can they go to $130?

Can they go to $150 a barrel?

And the point is, they're already there.

So we have a bifurcated market.

We have the physical market, the actual market for what the price of oil is.

And that market is what a refinery is being charged to buy oil to refine it into a product.

And that market has been trading between $130, $170 a barrel, pretty much for the past two months.

Then we have the paper market, the screen, the Dimex futures contract, the ICE Brent contract.

And those contracts have been trading at $20, $30 in some instances during this course at a $50 discount. to where the actual market for oil is.

So if we do not see any sort of resolution, or let's take a grand choice and say we do see a resolution, well, it is going to be through July and August before we see any sort of normalization if the Strait of Hormuz were to open today.

So what I'm saying here is you're going to see a tremendous amount of uncertainty that's going to last this market through the peak demand season during the months of July and August, the holiday season.

So what we are looking for on the upside is a futures market that will actually wake up one morning and realize it is not reflective of what the real price of oil is.

And so that would be a futures market migrating more towards where oil is really trading.

And that would be from right now, Brent crude oil, as you just noted, trading around $95 a barrel.

That means Brent crude oil more like $130, $135 a barrel with about a $5 to $10 discount relative to WTI.

So clearly if we continue to see a lack of progress in this, then we're certainly buying our time right now.

And it's only a matter of time because we're right now, it is April 21st.

In a month, we'll be at Memorial Day.

That is the start of the summer driving season, the holiday season.

Demand, we've been jockeying around the price of oil right now when demand globally, historically, is at its weakest.

We are now transitioning to the weakest demand part of the season to the strongest demand part of the season.

And when that hammer hits, that will be the catalyst with any sort of resolution that will put oil prices back well above $100 a barrel.

Yeah.

And even we are seeing this massive disconnect between the paper barrels and physical barrels and financial screens may be showing relative calm for now.

But refiners are paying huge premiums for immediate delivery.

And when we take a look at U.S. economic data whether we're talking about CPI PPI or this morning's U.S. retail sales figures, we know that the higher energy costs are creeping in.

So what are the impacts for not just American consumers, but also businesses around the globe?

Yeah, absolutely.

So the knock on, and this is a great lesson in chemistry for the general market, because it's not just oil that we're refining to gasoline to put into our cars or jet fuel to put into our planes, but it is markets like hydrogen, helium, fertilizers, These are all fossil fuel based chemicals that go into our food supply or go into the clothes that we wear.

So the knock on will continue because we're seeing a massive disruption in supply chains.

Of course, what we're talking about is oil, but the other really nasty secret out there is the loss of natural gas, LNG, onto the global market, because there is no work around the Strait of Hormuz.

At least with oil, we have two pipelines, one in Saudi Arabia, one in the UAE, that can avoid the Strait of Hormuz, thereby mitigating some, not a lot, but some of the loss of barrels flowing through the Strait.

There are no pipelines that could do that for Qatar, for instance.

So we're looking at a situation where the market is not only about to become short oil, it's already becoming short natural gas.

So that means short fertilizer.

So look for crop yields.

It's going to be short for hydrogen, helium, key products that go into chip manufacturing.

So the knock-on to inflation, yes, it's on the energy side, but it will be also represented on, first and foremost, on food supply because of the dirt, what this potentially means for fertilizer, all the way from the kitchen table, all the way to your computer with chip manufacturing.

So we're already seeing the disruption in those supply chains.

And the longer this goes, those disruptions and that disconnect remains.

And we're really on borrow time at this point from a massive hit to inflation and thereby certainly recessionary signals that the market is going to set because there is a there is a limit to how high prices could go.

And that limit is when people stop buying and paying those prices and they stop doing that because of economic downturn.

So that's the game of chicken we're playing right now with the market.

Yeah.

And Stephen when we pause and take a look at all asset classes in particular the equity markets the S&P 500 has seen record highs.

And when we break down the leaders in terms of sector we know that energy is far outpacing the other sectors year to date.

And we're hearing about companies such as Exxon as well as Chevron looking outside of the Middle East in terms of oil exploration and energy exploration.

But With refiners buying barrels at any cost because a supply disruption is existential to their survival, we know that the cost of food and energy is skyrocketing.

So how quickly does that actually start destroying refining margins here?

Yeah, absolutely.

And that's a great question because we're looking at a market where Jet fuel, for instance, is trading at around $230 a barrel oil equivalent.

So there are margins.

The margins are extremely wide.

So when you're talking about oil prices, the physical price that a refiner is paying, $130, $140 a barrel, they could refine that and then go sell that onto the jet fuel market for $230 a barrel, the diesel market for $250 a barrel.

Those are huge margins.

But those are only margins, and they're only huge if you could really realize them.

And that is the issue here, is if the refiner does not have the access, and this is the key, this is what the market's paying for, not necessarily for the commodity itself, but access to the market.

And therein lies a big underlying problem here, is that every refinery is different.

They blend and they maximize different types of crude oil to get to the specific yields of the type of products, gasoline, distillate, diesel, jet fuel, so forth, in their dominant market area.

What is happening now is even though those margins are allowed, the access, their ability to realize that, that is what is really challenged.

There is a limit.

The saying goes, high prices are the cure for high prices.

That is indeed the case.

Those high prices are supposed to bring supply to the market.

If you could get the supply to the market, and that is where the choke point is, and that's where the inconsistency is.

And therefore, without that access, the only other way you address high prices is through demand destruction, i.e. economic downturn.

So, yes, the markets are doing good from a production, exploration standpoint, a production standpoint.

And as you brought out, yes, very profitable for that side of the balance sheet.

In theory, it's also good for the other side of the balance sheet because the product markets are following.

It's just the ability to access, to put point A to point B together.

And that therein lies the conundrum that on paper, the margins are there.

I would reckon that the refiners are not necessarily maximizing these refiners just because of their inability to access this.

So what we're really watching now in real time is a fundamental shift in a complete market, global market that is changing as we watch it going forward.

So we already knew, always knew straight ahead of our moves. was always a choke point.

It was.

And the Bob L.

Nandee down in the Red Sea, that's also a choke point.

So what you're going to watch in the years ahead is the markets, whether they're Western oil companies or they're Middle East national producers, are going to start devising methods to mitigate now their exposure to these choke points, i.e. more pipelines to different market areas to expand their ability to access the global market.

Well, Steve, a lot to keep our eyes on in addition to just the oil prices.

So thank you so much for joining us this morning and thank you so much for sharing all of your insights.