Oil prices are back in the headlines having risen on increasing geopolitical tensions. The stand-off over Iran’s nuclear plans and capture of 15 British Navy personnel has raised worries about the risk of threat to oil supplies from the country.
Stephen Schork, a high-profile expert in energy research and editor of the influential daily Schork Report on energy markets, will answer your questions on the outlook for crude and the energy sector in a live online Q&A on Monday April 2 from 2pm BST.
Mr Schork has more than 15 years experience in physical commodity and derivatives trading, risk system modelling and structured commodity finance. For much of the 1990s Mr Schork was an analyst with the giant commodities trading house Glencore and he was a former proprietary floor trader at the New York Mercantile Exchange.
Mr Schork answers your questions on the energy sector below.
What is your opinion on buying oil futures for 2012? Do you think that most oil companies have overstated their reserves and therefore that despite any fluctuations in world economic growth oil will be more expensive in the future?
Matthew Hunt, London, UK
Stephen Schork: I am not a big fan of investing via futures. Long dated futures contracts are best suited from commercials that want to hedge or lock in future production. They are very poor investment vehicles for individuals.
Furthermore, no, with the notable exceptions I do not think “most” oil companies have overstated their reserve. As far as the future expense of oil goes, consider that adjusted for inflation, petrol is still cheaper today than it was in the early 1980s.
Consider in the US, people apparently have no problem paying $4.5 for a 12 oz. cup of coffee at Starbucks, but then go ballistic when they have to pay $3 for a gallon of gasoline. Therefore, adjusted for inflation I do not think oil will be more expensive in the future. Technology to source new reserves will appear, and the introduction of competing fuels from the alternative sector will help to keep a lid on prices.
Gas Storage is probably the most effective tool for increasingly security of supply and breaking open opportunities to trade gas with price transparency. How far off do you think we are from hub-to-hub transcontinental European gas trading using gas storage to routinely backstop trades?
Grayson, Milan, Italy
Stephen Schork: As long as our demand for gas increases - and it will - then so too will the demand for greater price transparency. Unfortunately I can not provide a timeline, but the momentum continues to move towards hub-to-hub market areas and all of the trading opportunities (i.e. location basis arbs) this provides.
What is your view on the shortfall in supply in the liquified natural gas (LNG) market in the short to medium term? Will LNG demand be constrained on a sustained basis by a lack of supply? How can investors best profit from this situation (i.e. which companies are attractive investments)?
Roger Springfield, Paris, France
Stephen Schork: My concern is with a manufactured LNG shortfall that we will surely see once Putin and Ahmadinejad formerly agree on their Gas “Opec”. Thus, I don’t see demand being constrained by supply, but rather, supply be encouraged by demand. Natural gas is now a true global market, but similar to oil, the bulk of supplies are concentrated in the hands of governments. Therefore, I do not have companies to suggest in this regard.
But keep in mind, all that gas has to be transported thus it would behoove you to look into the companies that ship LNG and/or the companies that build LNG tankers. Demand for gas is only going to increase, and therefore, so to will the demand to ship that gas.
Oil and gas prices have been through quite bumpy movements since the middle of last year. Do you think the market correction has completed? To what extent do you think the Iranian issue will impact the oil prices?
Kaili Jen, Taiwan
Stephen Schork: Keep you seatbelt fastened, because this “bumpy” ride is not over. As we saw with the spike in prices last week, geopolitical tension is never far from the surface.
What do you think is the outlook for cleantech and renewables in the current economic landscape?
Federico Caprotti, London
Stephen Schork: I think very positive. Both, from the standpoint of improving our environment, as well as reducing our dependency on Middle East oil. Here in the States, I don’t think corn is the answer, but at least the debate has been opened for cleaner alternatives, as it has been in Europe. I think there is no turning back. And, Opec is not happy about that.
The demand and supply balance for oil is presently very tight. The demand growth is close to 2 per cent, whereas the growth in oil reserves is less than that, despite the big effort by IOCs. Some Opec countries with high R/P ratios were expected to be investing to increase production to restore Opec’s ability to control prices. Except for Saudi Arabia, it is not happening. Why?
Luis Silva, Rio de Janeiro, Brazil
Stephen Schork: The entire global industry – from OPEC to western E&P companies – were slow to react when prices began climbing in late 2001. Everyone was of the opinion that prices would spike in the near-term, but regress in the longer term, just like prices did following the 1974 Arab oil embargo and again in the early 1980s at the start of the Iran/Iraq war.
This time it is different but we didn’t realise that until about two years later. Thus, we are still playing catch up to the current demand patterns.
Why do we not give more urgency to the debate on building the next generation of nuclear power stations when we are threatened with security of supply and global warming?
Jan Lengyel, Bury, UK
Stephen Schork: Nukes, as much as I am in favor of them, are, at least in the U.S. a political taboo.
The world’s oil extraction (all liquids) has stagnated in the past two years at around 85m barrels per day. Do you agree with T. Boone Pickens and Matt Simmons that we are unlikely to be able to extract oil at a faster rate any time in the future and that we should be looking at a gradual decline in this number?
Alfred Nassim, Ryde, Isle of Wight
Stephen Schork: No. As far as the likes of T. Boone Pickens et al, you have to look at their views with a jaundiced eye. After all, Mr Pickens manages a $4bn energy hedge fund. So he obviously has a vested interest in the direction of prices.
As far as Matt Simmons goes, I like Matt, but he and all the other Chicken Littles have been making the same, tired, wrong pronouncements ever since the industrial world made the transition to oil over 100 years ago. I am of the opinion that high prices are the best cure for high prices. Therefore, I expect the extraction numbers in the next two years to increase as these high prices encourage E&P.
Given that oil and gas are finite resources, what do you believe are the benefits that tempt the establishment to seek out new reserves at whatever economical and ethical cost rather than to research direct replacement sustainable energy sources?
David Watts, London, UK
Stephen Schork: If we define the “establishment” as the politicians, then there is NO temptation, for they have no will. As soon as prices get “too high” they will propose something idiotic. Two recent cases, the Democrats’ release of oil from the Strategic Petroleum Reserve in the election years 1996 and 2000 when oil was trading around $20 and the Republicans’ moronic proposal to rebate $100 to Americans last summer when gasoline topped $3 per gallon.
If on the other hand, we define the “establishment” as the people then I think we are already moving in the right direction. We all want a green earth and I think people are being educated that this will come at price. And, I think it is a price more and more people are willing to pay.
What could be the role of unconventionals such as oil sands and oil shales in the future energy mix? Could we this time see the industry emerge and flourish?
Stephen Schork: The future looks bright for synthetic crudes. As is was in the 1970s and 1980s. But back then the price of oil collapsed following the spikes of the Arab oil embargo and the Iran/Iraq war. This time oil is not collapsing and the need for oil sand/shale projects to help offset demand is strong, and will stay that way. Canada is often referred to as the “Saudi Arabia” of oil sands. Given the thirst for oil in the US, a lot of this incremental production will find a home.
I would be interested to hear your views on the sustainable price for oil, how gasoline prices affect crude prices, the outlook for natural gas, the demand and supply balance evolving for oil, the role of speculators in the market and how seasonal and cyclical factors affect price trends.
Constantin von Oppen, Baar, Germany
Stephen Schork: As we saw last summer, with spot prices trading well over $70 per barrel that this is the “limit” in the current economy. I don’t think vibrant industrial economies in the Pacific Rim, Western Europe and the US can sustain oil any higher without a severe economic backlash.
With regard to gasoline, high prices obviously create demand for refiners to buy oil to make the gasoline. So the gasoline market is a tremendous driver to oil prices. Another huge driver is the fact that about 8 out of 10 barrels of the world’s proven oil reserves are in the hands of the likes of Hugo Chavez and Ahmadinejad.
What do you think about the 20 per cent mandatory target for renewables - including a 10 per cent target on biofuels - that the EU just committed itself to reach within 2020? Is it feasible? And what effects will it have on the oil and gas markets if successful?
Carlo Viviani, Rome, Italy
Stephen Schork: I certainly have my doubts regarding the ability to mandate these targets. The technology, at least for corn-based feedstocks here in the US is simply not feasible, both from an economics, as well as utility standpoint. If it were, then why does the US taxpayer have to fund the ethanol lobby and why do we tariff Brazilian ethanol? If corn could fairly compete, we would not have to.
But, that said, we all (even us Republicans) want our children to inherit a greener, cleaner earth. Thus, let the market decide. After all, “green” is good business nowadays - just look at a chart of Toyota vs. Ford Motor.
Stripping out geopolitical risk, and other world tensions over supply stoppages, what do you foresee the price of oil, giving economic conditions and supply and demand factors, being over 2007 & 2008? Another way of asking it: how much are speculators pricing in per barrel of oil, geopolitical factors?
Stephen Schork: Based on last year’s price patterns it is safe to say that speculators priced in between $20 to $30 into oil last year. As we saw last summer, prices on the forward curve trading over $80 per barrel. But by the end of the year we were back to testing $50. I am of the opinion this price regression was simply air being let out of the speculative balloon.
Given the current geopolitical environment, and using last summer as our roadmap, I think on increased rhetoric with regard to Iran’s current brinkmanship that prices could again test the mid $70s this summer.
The Brent Crude forward curve is now virtually flat for May, June, July, August, September 2007. Is this simply because of near term geopolitical risks?
I Moore, Rotterdam, Holland
Stephen Schork: No, if that were the case, then the forward curve should (sic) be steeply backwardated, ie the near-term price dear to the deferred contracts. This is because people would be afraid of a stoppage in the flow of the commodity, and this fear would drive prices for contracts closer in date to physical delivery higher. A flat curve tells us of a market in balance, sans fear. It is interesting that with all the headlines from Iran, that the curve is flat.
What commodity do you think is the next one likely to be cornered?
Adria Burridge, Canada
Stephen Schork: Given the degree of globalisation that has overtaken the commodities markets in general, and energy in particular, it is hard for me to see markets being “cornered”, i.e. taking a controlling issue in both the derivative and the actual physical commodity.
The state owned companies, from Hugo Chavez’s PdVSA to the re-nationalisation of the Russian energy industry shows us that you can try and seize control of one market, but it is difficult to take control of both market - just ask Brian Hunter and the now defunct Amaranth.
But that does not mean people and or countries will not stop trying, thus the focus in this respect will be on the renewables. Here in North America everyone thinks (wrongly) that corn is the answer, hence the surge in prices on the CBOT. In Europe, there is a greater focus on biodiesel, a crop I believe to watch out for is rapeseed.
I often read articles forecasting and speculating about oil consumption in decades to come based on today’s current consumption trends. But surely if oil consumption carried on as is without sufficient carbon capture technology, its resulting global warming would deem such oil consumption irrational and thus likely avoided? The above concern does not seem to feature much in the forecasting I read in the daily newspapers, and thus could you please elaborate for those who are not specialised in resources or oil?
Charles Collocott, South Africa
Stephen Schork: You have tapped into one of the most frustrating aspects of economics, ie making long-term pronouncements about the direction of a market based upon static data in the here and the now. These forecasts are often wrong because people’s tastes change, technology advances and so forth as incomplete information works its way into the market. After all, who foresaw 30 years ago that a pint of drinking water in the US would cost more than a gallon of petrol?
Thus, I agree with you. I don’t think the shift in consumer demand to more environmentally friendly alternatives (for example sales of hybrids overtaking SUVs) is being factored into future demand patterns. This is a mistake