Financial Analyst Schenker Calls Crude Overvalued, Predicts Falling Heating Oil Prices
Jason Schenker, President of Prestige Economics. (image: opec.org)
Why are crude and heating oil prices so high? That is the question being asked by millions of consumers who cannot understand why crude oil is nearly $80 a barrel despite the fact that there is a recession, oil is widely available, and demand is low.
On Thursday, Jason Schenker, president of Prestige Economics—an economic consultancy and advisory firm based out of Austin—explained on Bloomberg radio why oil is currently valued the way it is and what his expectations are for crude and heating oil prices. In regards to the current cost of crude and heating oil, Schenker asserts that oil is overvalued as a result of the irrational optimism of medium-term economic expectations. What this means is that despite the existence of recession and rising unemployment, investors continue to trade as though economic recovery has already begun and oil demand is on the rise.
HeatingOil.com noted a similar observation made by Energy Security Analysis, Inc., which blamed current oil prices on investor overconfidence in a recovering market (in addition to speculation and a weak dollar). According to Schenker, when the market is optimistic, the trend is for prices to rise. However, he does not believe this optimism will last much longer and eventually the market will undergo a correction, bringing prices down to what is justified by supply and demand (which Schenker estimates to be in the mid-sixty dollar range). What Schenker’s predictions ultimately mean is that, if he proves right, consumers will simply have to wait until those on Wall Street come to grips with reality and lose the optimism that is driving them to keep prices high.
Artificially high oil prices will influence the actions of consumers who have interruptible natural gas contracts. These contracts are available to consumers who have fuel switching capacity—typically commercial buildings, condominiums, or apartment buildings—meaning they can heat with oil or natural gas. As HeatingOil.com reported on August 6, having the capability to heat with either natural gas or heating oil “allows flexibility in moving to the most advantageously priced fuel, especially at times of peak demand, like a cold snap”. The United States currently has a glut of natural gas, and that has made natural gas prices remarkably low, so consumers with the option will likely opt for natural gas.
But what’s good news for commercial consumers with interruptible natural gas service contracts could also be good news for home heating oil consumers who lack the ability to switch fuel capacities. As a portion of consumers opt for gas—and that portion is largely made up of commercial customers, who burn much more oil than homes do—overall demand for oil goes down, and home heating oil prices should sink with it. So according to Schenker, the existence and use of abundant low-priced natural gas should limit this year’s winter run-up in heating costs across the board, including heating oil prices.
While it’s frustrating to think that investors’ confidence in medium-term gains is affecting oil prices now, it is encouraging to know that Schenker and many other experts agree that heating oil prices will drop. If only they could guarantee us when that will happen.
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