WEBVTT - Stephen Schork Talks Oil Market Swings, Strait of Hormuz

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News. I want to take

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<v Speaker 1>a closer look now at the oil market, as the

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<v Speaker 1>prospect for a peace plan between the US and Iran

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<v Speaker 1>and along with the threat of further escalation the world

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<v Speaker 1>were to continue, have led to wild price springs. Let's

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<v Speaker 1>bring in Swings, I should say, let's bring in Stephen

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<v Speaker 1>Shork for some analysis of what we've been seeing in

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<v Speaker 1>the crude market. Stephen as the president of the energy

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<v Speaker 1>analysis firm, the Short Group. It's great to speak with

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<v Speaker 1>you once again, Stephen. Thanks for being here as we

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<v Speaker 1>watch Brent plunge more than four percent this morning. I

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<v Speaker 1>think we saw fourteen percent drop after President Trump announced

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<v Speaker 1>who was going to hold off on going after Ironni

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<v Speaker 1>and energy for five days. I wonder what you make

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<v Speaker 1>of these big moves that we've seen in your neck

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<v Speaker 1>of the woods. Good morning, Good.

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<v Speaker 2>Morning, Nathan, and absolutely and I think it is just

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<v Speaker 2>the ministative of the amount of speculation that we've seen

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<v Speaker 2>in this market. Point. We're all focused on the ice

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<v Speaker 2>BRN market and the NIMES WTI market, which are Atlantic

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<v Speaker 2>basin markets. That is to say that these are futures contracts,

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<v Speaker 2>and the futures is what they derivative, and they derive

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<v Speaker 2>their value off of a physical asset. In the case

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<v Speaker 2>of nomics WTI, that physical acid is landlocked in the

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<v Speaker 2>middle of the country in Cushing, Oklahoma, quite a distance

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<v Speaker 2>away from the Strada hor moves. So what we really

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<v Speaker 2>want to focus on is the Asian based markets, and

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<v Speaker 2>that would be the Oman market or the Dubai futures market,

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<v Speaker 2>and there we see a massive disconnect where the Brent

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<v Speaker 2>crude oil market is trading at around a thirty thirty

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<v Speaker 2>five dollars discount to Dubai for instance, So in other words,

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<v Speaker 2>oil where we needed, the oil that is pent up

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<v Speaker 2>in the Strada Hoo moves is trading at upwards of

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<v Speaker 2>one hundred and thirty one hundred and forty one hundred

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<v Speaker 2>and fifty dollars today. So that distance that skids them

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<v Speaker 2>between the Brent market the WTI market, those large discounts

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<v Speaker 2>just tells you that where the shortage is and the

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<v Speaker 2>shortage of oil is not in the Atlantic basin. So

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<v Speaker 2>we're focused on these prices that are now ok Yes,

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<v Speaker 2>Brent and WTI are plunging right now, but their discounts

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<v Speaker 2>are growing relative to where the actual war is so

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<v Speaker 2>what we're still seeing is a market that is now

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<v Speaker 2>pulling back sharply today based on some rhetoric, based on

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<v Speaker 2>some headlines. There's no reality there. The Iranians attack Demona,

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<v Speaker 2>the Israeli nuclear site, over the weekend. The attacks don't

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<v Speaker 2>seem to have stopped, at least on the Iranian side,

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<v Speaker 2>and their rhetoric on the Iranian side still seems rather belligerent,

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<v Speaker 2>regardless of what the administration is saying. So we are

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<v Speaker 2>still in the midst of a war. The headlines are

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<v Speaker 2>being pulled back on a headline, but in reality, the

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<v Speaker 2>spreads are telling us that this war is far from resolved.

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<v Speaker 1>So when you see this kind of disconnect between the

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<v Speaker 1>physical market and what we're seeing play out in the

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<v Speaker 1>futures contract, what does that tell you about where prices

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<v Speaker 1>could be once the war gets resolved.

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<v Speaker 2>Yeah. Absolutely, So what we do is we'll look at

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<v Speaker 2>you know, we'll do a little quantitative probabilistic modeling here

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<v Speaker 2>and at this point based on over the next four

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<v Speaker 2>weeks we just rolled into the new contract contracting WTI.

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<v Speaker 2>I'll pick right now, we have a cluster of right

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<v Speaker 2>around ninety two sixty one, So right now, WTI is

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<v Speaker 2>treading just around eighty eight dollars. Our first band, our

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<v Speaker 2>first envelope in the area where you would expect it

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<v Speaker 2>to kind of be range bound, runs from about one

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<v Speaker 2>hundred and two dollars to about eighty five dollars. So

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<v Speaker 2>we're still within that band Nathan of eighty eight dollars

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<v Speaker 2>eighty five dollars. That's where from a statistical standpoint, I

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<v Speaker 2>would expect to see support. But if we do see resolution, well,

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<v Speaker 2>if we see a resolution, and what's the best possible resolution,

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<v Speaker 2>a positive regime change in Iran, then we'll see a

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<v Speaker 2>six significant downdraft in prices IE prices back into the

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<v Speaker 2>fifty dollars range. If we see some sort of settlement

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<v Speaker 2>where oil starts to flow freely through the Strait of Hoboos,

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<v Speaker 2>but the regime in Iran is still in place, we'll

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<v Speaker 2>still see a pullback in our first target. Once we

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<v Speaker 2>break that eighty five dollars support, Nathan would bring us down.

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<v Speaker 2>Another twenty dollars would bring us down in that sixty

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<v Speaker 2>five dollars range. So essentially, what I'm saying is, if

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<v Speaker 2>we do see a resolution oil flowing again, we will

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<v Speaker 2>see a pullback, and where does that pullback go naturally

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<v Speaker 2>to where we were before this all started, and again

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<v Speaker 2>that would be back into that mid sixty dollars range.

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<v Speaker 1>In the meantime, of course, we've heard from the International

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<v Speaker 1>Energy Agency talking about this four hundred million dollar emergency

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<v Speaker 1>reserve release from its members, and we heard from a

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<v Speaker 1>Energy Secretary Chris Right that the first US flows have

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<v Speaker 1>started to come into the market as well. How much

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<v Speaker 1>of an impact could that have on price in the

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<v Speaker 1>short term.

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<v Speaker 2>Well, it's an excellent point. And the impact we'll have

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<v Speaker 2>is what is to store that spread I talked about

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<v Speaker 2>between Brent Wti and Dubai Oman. Yes, the United States

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<v Speaker 2>is releasing barrels where those barrels coming out of Houston,

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<v Speaker 2>Gulf Coast. Golf Coast has plenty of crudal right now.

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<v Speaker 2>The same goes with IEA members in Europe. Where's that

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<v Speaker 2>oil coming out of from Rotterdam, Northern Europe again into

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<v Speaker 2>a basin that is well supplied with oil. Now we

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<v Speaker 2>have to get that oil from where it's not needed

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<v Speaker 2>the Atlantic basin to where it is needed to the

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<v Speaker 2>Asian markets. And that comes out of premium, that comes

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<v Speaker 2>out of cost. So with that oil coming out into

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<v Speaker 2>the market. One, it will continue to distort that spread

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<v Speaker 2>and kind of give a false signal of weakness in

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<v Speaker 2>Brent WTI and really kind of ignoring where the shortage

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<v Speaker 2>is as I said, in Asia. Therefore, it is having

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<v Speaker 2>that impact. And let's keep in mind that's a lot

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<v Speaker 2>of oil, but realistically you could only get maybe five

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<v Speaker 2>million barrels a day logistically onto the market from those reserves.

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<v Speaker 2>Well that's only about quarter of what we were losing

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<v Speaker 2>through the strait of her moves. So it is going

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<v Speaker 2>to have an impact, but a deminimous impact because it's

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<v Speaker 2>really impact in the markets that are well supplied with oil.

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<v Speaker 2>We still have to get it to where they're not supplied,

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<v Speaker 2>and again transportation logistics so forth, that's going to come

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<v Speaker 2>at an added cost.

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<v Speaker 1>Hugely informative Steve, and again great to have you back

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<v Speaker 1>on with us on daybreak. That is Stephen Shark, president

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<v Speaker 1>of the Short Group,