Oil slides on OPEC+ concerns, debt ceiling drama

The Schork Group Principal Stephen Schork joins Yahoo Finance Live to discuss oil prices amid the debt ceiling debate, China's Covid crisis, and OPEC+ uncertainty.

Video transcript

- Oil closing at its lowest level in about 4 weeks, sliding below 70 bucks a barrel ahead of the OPEC+ meeting this coming weekend. For more on what we're seeing play out in the price of oil, we want to bring in Stephen Schork, the Schork Group principal. Stephen, it's good to see you here.

So lots of focus on that upcoming OPEC+ meeting. Also, the uncertainty down in DC about what's going to happen with this debt deal. What do you think is the primary driver that has been weighing on oil prices so far?

STEPHEN SCHORK: Well, certainly, I think the debt ceiling and with regard to, well, are we not going into recession? We know that Germany, Europe's largest economy, is in recession. So how long can Europe and/or the United States hold out?

So certainly, that is a contributing factor. We also have the never-ending story of COVID, rumors that there was another outbreak in China. And that has been the bull's biggest trumpet right there since the first quarter. That is to say, China demand is going to be stout this summer. We haven't seen it yet.

So that is certainly starting to weigh on the markets and moving some speculators and bullish speculators outside. So essentially, what we're looking at is a fundamental overhang in the market with regard to economic contraction. Now, we've also had, of course, in technical signals, data point have been bearish. And so we've got the ingredients now for that dip below $70 today.

- Yeah, I mean, looking at where prices have been and where OPEC wants them to be, clearly not at the $80 a barrel level. We've got the June 4th meeting coming up. Are we expecting any move on that front in terms of production cut?

STEPHEN SCHORK: Yeah, I think, certainly, this is going to be a discussion because we had the announced production cuts a little while ago. You had a brief pop in price. But we've been heading steadily lower at this point.

OPEC has to play a very sensitive game here. They certainly want prices higher, I would say closer to that $80, $85 per barrel on the global market. But they don't certainly want prices much higher than that because then that increases the chance of economic contraction as our energy costs continue to rise. And that was essentially the reason why Germany has dipped into recession.

So at this point, I think OPEC is going to take a wait and see. We've had this short-term downturn. Of course, we're below $7 a barrel. But there are some fundamentals now that are underlying the market. Here in North America, we're seeing a cutback on production, both in Canada and in the United States as we cut down our drilling rigs.

Also, going forward with regard to drilling, we have increased costs inflation both for labor, steel, cement to drill these barrels. So that is certainly increasing. And we have credit issues with rising interest rates. So we could start to see US production, Canadian production plateau as we go into the summer.

What's also impacting the market right now are wildfires up in Alberta. This is Canada's oil patch. So that has limited imports recently coming into the United States. And, of course, this past weekend, Memorial Day is the start of the summer holiday season. So demand for gasoline, demand for jet fuel is about to increase.

So we do have these underlying fundamentals. I don't think OPEC wants to get ahead of this with regard to demand and pushing prices up too much going forward.

- Stephen, if we don't see any action from OPEC+ this coming weekend, gas prices-- you mentioned that quickly. Here we are today, 358, about a buck lower from where we were a year ago. What do you think that number will look like towards the end of this summer? Are we going to stay relatively flat?

STEPHEN SCHORK: Oh, right now, yes, I do think-- I do think we are-- again, barring a recession, a severe recession here in the United States, our modeling had taken the oil prices down into that low $70 range. So, of course, we've broken that today. So I do think we are now plumbing the lows that we've seen in the market.

So at 358, as we go in to the summer, we're going to start to see production in-- excuse me, demand increase as the weather warms. Production has been very-- refinery production has been stout with some refineries running at 97% of capacity. So they're really churning out a lot of product.

So this product coming to the market kind of juxtaposed with demand, I think, will balance out. And I think we'll see steady prices going into the end of the season, which would be, of course, Labor Day in early September.

- Some welcome news there for drivers this upcoming summer season. Stephen Schork, always great to have you, the Schork Group principal.

STEPHEN SCHORK: Thank you.

- Well, coming up--