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OPEC+ oil volume 'will stay the course': Strategist

The Schork Group Principal Stephen Schork joins Yahoo Finance Live to discuss the U.S. energy outlook, OPEC+, and how inclement weather will impact oil prices.

Video transcript

RACHELLE AKUFFO: Oil prices falling further today, still under pressure. Let's take a look first at how WTI crude is falling. We're seeing that that's down about 2%. We also have Brent crude down on the day as well.

So here to discuss the latest on energy and oil, of course, is Stephen Schork, the Schork Group principal. Stephen, thank you for joining us. So I first want to get your reaction to what we're seeing. Obviously, you have some of these factors leading into it, like the strong dollar. What is keeping you-- what are you keeping an eye on in the oil space right now?

STEPHEN SCHORK: Yeah, absolutely. It's all about the economy right now. We've been in the cap now for the past six months that the United States was headed for. And we're certainly in a mild recession at this point. And that has been weighing on oil prices throughout this summer. Of course, what is keeping me up at night is the unmitigated rampage that we're seeing, as it were, and inflation. There is no cure for it right now.

And we've got a big dose of what Jay Powell and the Fed has to do. They must, they must tank the economy to tame inflation at this point. So I do believe there was a part of the market that was hoping out that, yes, maybe we're not in recession.

But I think it's dawning on the market, no, not only are we in a mild recession, but given the actions that the Fed must take, the fear now is that we are going to head into a severe recession. And that's being reflected in all commodity markets, keeping in mind that commodity prices are your best leading economic indicator. So we're getting this harsh selloff, not just in oil, but in all industrial commodities. And this is a clear sign that there's trouble ahead for the US economy.

SEANA SMITH: Well, Stephen, let's talk a little bit more about what that trouble could potentially look like, especially when it comes to crude. So crude today closing at another low, at lowest level since January, just above $76 a barrel, I guess. What do you see as a potential downside risk here?

STEPHEN SCHORK: So, right. So the tail risk now at this point, if we do see a significant drop-off in economic activity, we're looking at oil back over $50 a barrel. So that is going to require a significant pullback. Keeping in mind that we are now in the weakest part of the season as far as demand is concerned, it is shoulder month.

So the refineries have shut down a lot of their units. They're retooling. They're doing their appropriate maintenance. They're acquiring the new blend stocks for the new winter fuels. So they're not actively buying in the market now. So what we have to watch for is over the next month because when refinery demand comes back, but if it is being muted now by increased economic demand, then we are setting up a scenario.

So by year end, we're looking at in our lower case model, our bear market, we're looking at a upper lower quartile range in prices from the low 60s to the mid 40s. So worst case scenario with a significant turnback, $45 oil on the bottom and our risk tails.

RACHELLE AKUFFO: And what are you keeping an eye on in terms of what you're seeing with OPEC and OPEC+ and their potential to stay the course in this environment?

STEPHEN SCHORK: Yeah, absolutely. They'll stay the course. And they've been maintaining the course. Of course, they were in the crosshairs of a lot of people complaining that they weren't bringing back production fast enough. As for US domestic producers, keeping in mind that-- well, ever since over the last two years, we've yet to really come out of COVID. Every time we think we've turned the tide on COVID, we see another city in China shut down for COVID mitigation protocols.

So that was that constant fits and starts with this economy. Are we finally going to jump that COVID hurdle and therefore allow both producer, national oil companies and domestic producers, to really open up the taps? And they've been reticent because once bitten, twice shy. We're talking about the five top oil companies in 2020, COVID, that lost $70 billion.

Yes, they have made it back, but this is a boom-bust cycle. They went bust, and now they need the booms to get them through the bust. So right now, they are holding the cards close to the chest. They are going to be reticent, especially in this economy, to see how sharply oil prices-- and this is a reminder how quickly oil prices could come off.

So the producer is certainly going to reign in. They've gone in fits and starts over the past year increasing production at a marginal rate. But I would surmise with oil now dropping significantly below $80 a barrel, setting up shop there, and if our modeling is correct, and we see oil at that $50 range, you will see a sharp contraction in domestic, as well as global oil production.

SEANA SMITH: Stephen, what's it going to take for oil to stage a recovery?

STEPHEN SCHORK: We're going to absolutely need to see inflation turn the corner. So once inflation turns the corner, that takes the pressure off of the Fed. That takes the pressure off the Fed. Then we see a re-easing of interest rates, and demand is allowed to grow. My fear now is that we're just seeing the other shoe in the inflation story drop. Now, going into the summer and through the summer, it was the energy situation. Of course, we've seen record prices, record inflation as far as energy is concerned.

The other shoe that is about to drop is we're now in the fall harvest. This fall harvest in the United States is going to disappoint. We put in fewer corn seeds in the spring because fertilizer prices was so high because natural gas prices are so high. So we planted less corn. We increased our demand this summer for corn, i.e. increasing the ethanol waivers. So we're going to be pulling fewer corn acres out of the ground, and it's been a poor crop already.

Already, industry experts are saying, we're going to need to see back to bump bumper crops to get supply, food supply, to where it needs to be. So the next inflation we're going to see is a massive increase of prices at the grocery counter. So that's not going to happen anytime soon. Therefore, the Fed is going to have to remain aggressive.

So what we have to look for is when are we going to get inflation tamed. And it's certainly not going to happen in the fourth quarter. Perhaps by going into the spring planting season, we'll get a reprieve. But it's going to be a very expensive, very volatile six months, going in-- through the end of this year and through the winter next year.

SEANA SMITH: I have a feeling we will be speaking with you a lot over the next couple of months. Stephen Schork, always great to have you. Thank you.