2020 will be an ‘extremely difficult’ year for oil industry: Schork


MARIA: WELCOME BACK. CRUDE OIL IN FOCUS THIS MORNING, TAKE A LOOK. ANALYSTS ARE PROJECTING A SUPPLY GLUT IN 2020. THIS DESPITE AN INITIAL TRADE DEAL BETWEEN THE U.S. AND CHINA AS WELL AS OPEC PRODUCTION CUTS. JOINING US NOW, STEVEN SHORK. DO YOU AGREE WITH THOSE OUT THERE THAT ARE LOOKING FOR TOO MUCH OIL, A GLUT IN SUPPLY? WHAT’S YOUR TAKE FOR 2020?>>ABS A LIEUTENANTLY, MARIA. WE ALREADY HAVE TO A CERTAIN EXTENT A GLUT IF YOU BELIEVE IN THE FORWARD CURVE OF THE MARKET. SO WHAT WE’VE SEEN OVER THE LAST QUARTER IS THE PRICE OF OIL PRICED OUT INTO THE FUTURE FOR NEARER TERM DELIVERIES SO ON THE FRONT END OF THE CURVE IS LOSING VALUE TO OIL PRICED FURTHER OUT ALONG THE CURVE. IN COMMODITY MARKETS WHERE THE NEARBY MARKET FALLS RELATIVE TO THE OUTSIDE MARKET, THAT IS YOUR CLEAREST TELL TALE THAT EITHER YOU HAVE TOO MUCH SUPPLY, YOU DON’T HAVE ENOUGH DEMAND OR YOU HAVE A COMBINATION THEREOF. SO YES, THE MARKET IS WELL-SUPPLIED WITH OIL. NOW, I AM GOING TO PUT A CAVEAT OUT THERE, MARIA. WHAT WE’RE ABOUT TO SEE, IT BEGAN LAST WEEK, WE’RE GOING TO SEE FOR AT LEAST MAYBE THE NEXT FOUR, FIVE WEEKS, YOU’RE GOING TO SEE A MATERIAL DRAWDOWN IN CRUDE OIL SUPPLIES IN PAD THREE WHICH IS THE U.S. GULF COAST. THINK MISSISSIPPI, THE COAST OF ALABAMA, LOUISIANA, TEXAS, SO FORTH. THE REFINERY, OIL REFINERY, EPICENTER OF THE UNITED STATES. YOU’RE GOING TO SEE A MASSIVE DRAWDOWN, PROBABLY WE SAW A DRAWDOWN IN BARRELS OF ABOUT 3 MILLION BARRELS LAST WEEK, THE MARKET GOT EXCITED ABOUT THAT. YOU’LL PROBABLY SEE ANOTHER SEVEN TO MAYBE 10 MORE MILLION BARRELS DRAWN DOWN IN THIS MARKET AREA OVER THE NEXT MONTH. THIS IS VERY NORMAL. SO IT’S VERY IMPORTANT THAT INVESTORS OR TRADERS PAY ATTENTION TO THIS. YOU’LL SEE MEDIA HEADLINES SAYING THE INVENTORIES ARE FALLING. IT WILL BE A SHORT-LIVED DECLINE. BARRELS WILL COME BACK IN JANUARY. THIS IS ALL ABOUT AN ASSESSMENT THAT OIL INVENTORY OWNERS ARE ENCOURAGED TO PURCHASING THEIR INVENTORY — PURGED THEIR INVENTORIES THEY HAVE ON RESERVE BECAUSE THEY’RE TAXED ON THE INVENTORY. THEY WANT TO DRAW IT DOWN, TO LOWER THE TAX BILL. LET’S NOT GET FOOLED BY A DRAWDOWN IN THE OIL OVER THE NEXT FEW MONTHS.>>OIL GLUT, THAT SEEMS TO BE COMING FROM THE U.S., AND YET THERE’S A STORY IN THE WALL STREET JOURNAL TODAY SPEAKING TO BANKS BEGINNING TO TIGHTEN LOANS TO DEVELOPERS. I GET IT ON THE SEASONALITY AT THE REFINING LEVEL. BUT ON THE E & P AREA, COULD THERE BE THE QUESTION THAT THERE’S GOING TO BE A TIGHTENING BECAUSE THE GLOBAL SUPPLY IS COMING FROM WEST TEXAS.>> YEAH, ABSOLUTELY, IT’S AN EXCELLENT POINT. WHAT YOU’RE GOING TO HAVE — WE HAVE TO KEEP IN MIND, AT THE END OF 2014, ALL THROUGH 2015, OIL PRICES CRASHED FROM $100 A BARREL DOWN TO $30 A BARREL. WHAT DID WALL STREET DO? THEY EXTENDED THE CREDIT TO THE OIL PATCH. DOWN ANOTHER FIVE YEARS. SO THOSE FIVE YEARS ARE UP. SO BETWEEN 2020 AND 2022, YOU HAVE 140 BILLION WITH A “B,” DEBT THAT IS COMING DUE. WALL STREET IS NO LONGER IN THE MOOD TO EXTEND THAT SLACK. THEY WANT TO SEE THE MONEY. YOU’RE GOING TO SEE A MAJOR CONTRACTION IN THIS INDUSTRY OVER THE NEXT FEW YEARS. YOU’RE SEEING A PULLBACK ON CAY EX. THERE WILL BE A — CAP EX. THERE WILL BE A NUMBER OF LOWS IN THE PATCH. THEY WON’T BE ABLE TO MEET THE DEBT OBLIGATIONS. YOU’LL SEE A LOT OF BLOOD-LETTING OVER THE NEXT TWO YEARS. IT WILL BE AN EXTREMELY DIFFICULT TWO YEARS IN THE U.S. OIL PATCH HERE.>>STEVE, IT’S MIKE MURPHY. DO YOU SEE A POINT WHERE THE U.S. EQUITIES, ENERGY EQUITIES ARE INVESTABLE AGAIN OR REBOUND FROM THIS LONG DOWNWARD SLOPE THEY’VE BEEN ON OR WILL THE PRICE OF OIL NEED TO MOVE HIGHER FOR THAT TO HAPPEN?>>I DO. FOR INSTANCE, WE SAW THE SUGAR HIGH ON THAT ARAMCO IPO, AN A IPO THAT WAS 10 YEARS TOO LATE. SO THE INDUSTRY DOES RECOGNIZE THIS. I THINK THE INDUSTRY IS SIGNALING TO US THAT WE’RE DOWN IN THIS RANGE, THAT IS TO SAY THAT OIL, 55 TO $65 RANGE IS HERE TO STAY AND WHY OIL COMPANIES, THE MAJOR WESTERN OIL COMPANIES NO LONGER CALL THEMSELVES OIL COMPANIES, THEY’RE ENERGY COMPANIES, NATURAL GAS COMPANIES, POWER COMPANIES. THE COMPANIES ON THE FOREFRONT OF MAKING THE TRANSITION OF BRANDING THEMSELVES AWAY FROM OIL TOWARD THE PETROCHEMICAL INDUSTRY, THE POWER INDUSTRY, THOSE ARE THE EQUITIES THAT YOU HAVE TO BE FOCUSED ON.>> FOR 2020, WHAT’S YOUR FORECAST FOR OIL PRICES?>>RIGHT NOW, THROUGH THE END OF THE YEAR, OUR MODELS ARE SHOWING ONE, FIVE% CHANCE ONE, FIVE PCHANCE ONE, FIVE PERANCE ONE, FIVE PERCECE ONE, FIVE PERCENT CHANCE THAT WE’LL — OIL IS RANGE BOUND BETWEEN THE MID-TO LOW 50s, TO THE MID TO LOW — LOW TO MID-60s. A VERY NORMALIZED TRADING RANGE THROUGH YOU 2020, ASSUMING WE REMAIN OUT OF RECESSION. MARIA: WE WILL LEAVE IT THERE. GOOD TO SEE YOU THIS MORNING. THANKS SO MUCH.

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