Gartman: Oil Glut Ahead, Then "Obsolete"
Friday, 11/21/2014 16:32
Opec set to fake an output cut, "cheat like madmen" as fusion energy looms...
DENNIS GARTMAN is the man behind The Gartman Letter, a daily newsletter discussing global capital markets.
For more than 20 years, The Gartman Letter has tackled the political, economic and social trends shaping the world's markets, and Gartman himself is a frequent guest on CNBC, Bloomberg and other financial media outlets.
Here Gartman speaks to HardAssetsInvestor managing editor Sumit Roy to discuss the recent volatility in the crude oil market and where prices are headed from here...
HardAssetsInvestor: Is the US oil boom the biggest reason oil has plunged during these last several months?
Dennis Gartman: I would say 40% of the reason prices have fallen is production in the US; 30% is the dissention and the problems with Opec; and the rest is weaker-than-expected demand globally. Rising US production is not the only reason oil prices are down, but it's probably one of the largest reasons.
HAI: US oil production hit 9 million barrels per day earlier this month. How high do you think it can go?
Gartman: We're going to be at 9.5 million barrels per day by the middle of January because there's just so much stuff still coming on stream. We'll be 9.5 early next year and we'll be at 10 by midyear next year. After that, you may get some slowing of the increase in production.
HAI: You're talking about 10 million barrels per day sometime next year. Do you think output can go beyond that at some point?
Gartman: That's a good number. Once you get to 10.5 million barrels per day, it's probably going to be difficult to get much past that.
HAI: On the flip side, if prices get too low, will US producers start to cut back?
Gartman: They'll just slow the increase. They may slow down some rigs for next year, but are they going to reduce crude oil production? No, not at all.
That's especially the case if the futures market moves to a real contango, which I think it will. In that case, there won't be much of a decline in the deferred futures. All of the decline occurs in the front end. If the deferred futures are only down another $2 to $3 from here – which is what happened when you had the last collapse, the back end of the futures market didn't fall much at all – that's a hedger's dream. They'll just go ahead and produce and sell the deferred futures and ride the curve down. They'll be happy as a lark.
HAI: We have that nuclear deadline for Iran coming up on Monday. Do you have a feeling about what's going to happen there? Are they going to reach a deal?
Gartman: Of course not. And even if they did, they would lie. No deal is going to be reached. We'll defer the deadline again. The meeting will probably end with an agreement to meet again three months, six months later; that's what they always do.
HAI: Ultimately, do you think the US Congress is going to put more sanctions on Iran?
Gartman: That's a good question, and sanctions could really ignite change in Iran. In Iran, the students and the workers have had it up to their eyeballs with 30 years of the Islamic revolution. They've had enough. You could push the students and the workers in Iran over the edge if sanctions went into effect and if the government had to curtail any of their subsidy programs. If it weren't for the subsidies on energy, on food, and on clothing that are in effect and paid for by high oil prices, all hell would break loose in Iran.
HAI: Turning to the Opec meeting next week on November 27, do you think the cartel will announce a cut to production?
Gartman: No question about it; they will announce a cut in production. Will any of them cut? No. They'll cheat like madmen.
Take Iran, for example. Pick a number somewhere north of $125 a barrel for Brent and that's what the Iranian government needs in order to meet the budgetary promises it has made to its citizens. There are huge subsidies for gasoline over there. There are huge subsidies for agricultural and for food. If crude oil is trading at $80 and you need $125, do you cut production? Absolutely not; you increase production. You don't have any choice
Venezuela is in the same circumstance. And that is the problem that nobody wants to face. I'm amused by the number of people who say lower prices will curtail production. Lower prices may slow the increase here in the United States, but it is not going to decrease the production of crude oil from Iran, Venezuela, from Iraq, or from the Kurds.
The Kurds finally reached an agreement with the rest of the government in Iraq to allow them to produce crude oil. Do you think any of them care what the production costs are for American crude oil or for Canadian crude oil? They don't even care what their own production costs are. What they care about is cash flow.
HAI: It definitely sounds like you're painting a bearish picture for crude oil prices. Do you have any views on how low prices can go?
Gartman: I think we will be surprised. I was looking back and reading a little textbook on energy the other day and I was shocked. The first great bull market in crude oil was around the year 1885, and it took crude oil up to almost $18 a barrel, and it collapsed two years later to 10 cents.
About 10 or 15 years later, when Rockefeller had gained control of both transportation and production, crude oil rallied back to about $5 a barrel. He cracked it all the way down to once again, 10 cents.
Now the last great break took us from $145 in 2008 to below $40. All I'll say is, prices will go sharply lower than anybody ever imagined.
HAI: I heard you talking recently about the very long term for oil and the competition from fusion technology. Can you tell us more about that?
Gartman: The history of humans is that we come up with new methodologies, new manners of fuel every time. Oil has only been around since 1885 when the first real oil well in Northwestern Pennsylvania was spun in. Oil's only been around for 160 years.
We speed everything up so dramatically in the modern world that the age of oil is probably behind us. Northrop Grumman put out that press release saying it is this close to having a portable fusion reactor. If you can have fusion nuclear energy, it's free. You use water; the energy is free.
And unlike fission, where you need uranium, and you have dirty stuff to get rid of later, fusion is absolutely the opposite. It uses water and there's no byproduct. Power becomes free.
HAI: Do you think oil could be obsolete in our lifetime?
Gartman: It'll happen in our lifetime. Energy is the driving force in all industry, in all aspects of life. Betting against the ability of human beings to come up with the next new technology or the next new fuel is a very bad bet. The fact that Northrop Grumman said it can do it now has me believe we may see it in as little as 10 years.
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