Meeting demand for oil-pricing answers

Stephen Schork, a former New York commodities trader who lives in Villanova, is attracting a lot of attention with his three-year-old newsletter that analyzes the wild changes in oil prices.

Only about 100 people have agreed to pay the upwards of $10,500 that he charges for a one-year subscription.

He shows up regularly in newspapers and on national television as reporters seek help in making sense of this crucial and volatile commodity market. This exposure during the year when crude oil prices nearly doubled has produced "a ton of people on trial subscriptions," he said.

Schork, 41, caught a wave when the collapse of Enron and other factors came together to drastically change the oil markets.

In addition to supply-and-demand and what OPEC is thinking, people with oil-centered lives now "have to worry about what some 28-year-old hedge fund manager in Manhattan, with billions of dollars of other people's money, will do next," Schork said over coffee at the MilkBoy Cafe in Ardmore.

"Our daily report links different lines of communication and philosophies and filters out the noise created by speculators and pundits. We instill in our clients a firm grasp of the constant drivers that ultimately rule the market. And we help them take advantage of mispriced commodities," he said.

After years as a trader, Schork worked for a time at Conectiv Energy, now a unit of Pepco Holdings Inc., in New Castle, Del., where he started the newsletter as an internal communications tool. In 2005, he launched his new business with Conectiv as his first subscriber.

The collapse of Enron set the stage for his success. It created a void that attracted a new type of trader and a need for the type of analysis he offers. "Nature abhors a vacuum. Goldman Sachs and Morgan Stanley led the charge in," Schork said.

Michael Dever, founder and chief executive of Brandywine Asset Management in Thornton, a hedge fund that has no connection to Schork, agreed. "Oil futures offered liquidity, a lot of strategies that can be employed to make money," Dever said.

This change later created the demand Schork seeks to meet. "All of a sudden there was an influx of traders who didn't understand the commodity, using skill-sets from other trading," Schork said.

For most of the oil industry's history, oil producers have been able to influence prices. In the early days of the Texas oil boom, each discovery added so much oil that prices dropped too low to recover the cost of the wells, much less find more oil to meet growing demand.

So oil companies persuaded politicians to have the Texas Railroad Commission regulate oil production and support higher prices.

In 1960, the Organization of Petroleum Exporting Countries (OPEC) was created by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Nine other countries joined later. It became a permanent intergovernmental organization built on the Texas Railroad Commission model.

Now OPEC is losing its ability to control prices, as the 2006-07 volatility shows.

In 2006, the market price was driven by fear of an Iranian-initiated disruption in oil supply. "All you heard Iran, Iran, Iran, 24/7," Schork said.

Then came 2007, the year the crude oil price shot up from $51 to $100 per barrel (42 gallons). For the first six months, prices shot straight up, driven by record amounts of speculative money. "By the end of July, speculative money owned a record amount of contracts to eventually own physical oil," Schork said.

Then came the collapse of the subprime market, and, during the four weeks of August, speculators "sold the vast majority of their position. They didn't sell because they thought the bull market for oil was over. They needed funds to offset exposure on the other side of their portfolios," Schork said.

When that happened, oil prices fell from the cusp of $80 to below $70. Then fear of Iran-related disruptions took over again, driving prices up to a high of $100, which lasted only a day, on Jan. 1.

Schork was explaining all of this with his daily newsletters, rich with narrative and charts, e-mailed soon after midnight so they're available at the start of business here and in Europe.

He works 14-hour days, taking a break for dinner with his wife and three children.

Schork launched the business with his savings, which he now thinks was a good move. "If I had been spending other people's money, I might have spent too much on a big office instead staying focused on building and marketing the service," he said.

Now he's hiring overseas correspondents and planning to travel more. He returned last week from the OPEC ministers conference in Vienna, Austria, where he met with representatives from 10 overseas energy companies.

U.S. influence over oil-producing nations is waning, so understanding how OPEC thinks and might act is becoming more important.

Relations with the Arab nations will remain difficult, Schork said. They see the United States shifting to green fuels so it won't need the product that is 95 percent of their national incomes. "You're telling me you don't want to buy my product in the future, but in the meantime you want to keep the price low," Schork said an OPEC official told him at the recent conference.

As the market changes, he adapts.

At the coffee shop interview, he spotted a statistician from a leading university whom he hopes to add to his team.

"We need to employ a more mathematics-oriented view of the marketplace," Schork said. "It's fine and dandy to understand supply and demand and what we think this will do. But the way this market traded, it has become very important to be grounded in lot of different types of math and in event probability. Traders are taking more of a Las Vegas gamblers' view of the market. So we need to employ probability theory."