00:00Stephen Shork is principal and editor of the Shork Group, which provides daily snapshots of the global energy markets.
00:08Great to have you on Global Business Europe, Stephen.
00:10So with oil above $100, how worried should we be about where it goes next?
00:16It should be extremely worried.
00:17And let's keep in mind, we're only talking about the futures price, the paper price of oil.
00:22The physical price of oil is trading at about a $10, $11 premium.
00:26That is, oil price for Brent that is scheduled to go on cargoes in the North Sea are trading at
00:32about a $9, $10 premium to where the futures are trading.
00:36So already, we're talking about $111, $112 barrel crude oil.
00:42Now, the more important thing and the more concerning thing here is that it's the price of oil.
00:48You don't put crude oil in your cars.
00:51You do not put crude oil in your furnaces to heat your home.
00:54You put the refined product, and that is where the issue is.
00:58We have two wars.
01:00Yes, the war with Iran and the United States.
01:02But more importantly, as far as the refined products go, it is the war with Ukraine.
01:06Because a significant amount of Russian refining capacity has been taken offline during this war.
01:13So now, the United States is the marginal supplier of diesel fuel to Europe.
01:20So you have diesel fuel in the United States.
01:23Now, the futures market has traded over $200 a barrel.
01:27Repeat that, $200 a barrel, which means the European price is significantly higher.
01:33And that is because of a shortage of refining capacity.
01:36We just don't have the capacity, Europe that is, to make the diesel fuel.
01:41And now, the fact that we are coming out of the summer, which is the weakest demand part for diesel
01:46fuel, we are going into the fall, the winter.
01:49We are going into the peak season, looking at a significant shortage of supply and our ability to replenish that
01:56supply.
01:56So is that what's making this oil price spike potentially more long-lasting?
02:02Because we've seen this roller coaster before.
02:05Indeed.
02:07Yeah, absolutely.
02:08So to that point, when this started, the war with Iran started, started in early March.
02:14So towards the end of winter and going into a lull into the spring.
02:19And then we have the United States.
02:21We had Europe.
02:21We had China releasing or accessing their strategic supplies of crude oil, which helped get through the peak summer driving
02:29season, the gasoline season.
02:31Those oil barrels, at least in the United States, that's done.
02:35We essentially depleted our supply of usable oil sitting in the Strategic Petroleum Reserve.
02:42So now, as this war with Iran gets hot again, we do not have these strategic supplies to fall back
02:48on.
02:49So not only do we have a lack of capacity to turn crude oil into what we need, now we
02:54do not have a strategic supply of crude oil to offset whatever goes missing in the commercial market.
03:00If this conflict drags on, what oil price really starts to hurt the global economy?
03:07Because it seems a lot of this already is priced in.
03:11And a lot of it is.
03:12Now, mathematically, we can do probability distributions of how high we can go.
03:17Certainly, by the end of this month, I can see Brent crude oil.
03:20I can make a case within two standard deviations.
03:22We could be up to $115 a barrel.
03:25Three standard deviations, $140 a barrel.
03:27Can we get that high?
03:29Absolutely.
03:29Why?
03:30Well, we've gotten there before.
03:31So if we've been there before, we can go there again.
03:34But to try to answer your question, how high can we go, once we get to that $130, $140 level,
03:41what that translates back to, that is essentially the peak of the market.
03:45Because there are only two ways to address high prices.
03:49That is supply and demand.
03:51You get more supply to the market to take advantage of those high prices.
03:54But as we've just laid out, our ability to get supply to the market is limited.
03:58So the only way to address this is demand destruction.
04:01That is to say, recession.
04:03So economic downturn.
04:05So we're already now here in the United States, diesel prices are approaching $6 a gallon.
04:10That's unheard of, unprecedented.
04:12Gasoline prices are well on the record to hitting record highs.
04:16So we're already pushing the envelope to just how far the consumer can go.
04:20So if we see a sustained rally in oil over the next weeks, months, then certainly what this means for
04:27inflation, sky-high inflation.
04:29What this means for an economic downturn increases the odds immensely the longer prices stay high at these levels.
