In mid-January, everyone's favorite market indicator Dennis Gartman, made an infamous prediction when oil was trading in the mid-$30s, when he said that oil won't hit $44 again "in my lifetime"
Sure enough, three months later, oil "killed" Gartman, or at least his credibility, when it jumped above $44.
We thought that Gartman had learned his lesson, and would avoid such bombastic forecasts in the future. Turns out we were wrong, and earlier today Gartman again appeared on CNBC, where he said that "investors shouldn't expect the commodity to break through $55 for a few years."
That said, Gartman just may be right on this one: he said that supply continues to outpace demand, adding that "despite recent optimism around talks between Russia and Saudi Arabia that could result in reduced output" Gartman doesn't see the supply issue easing.
Gartman's main focus has been on the oil futures curve, and that the contango has been widening as of late. Contango is the difference between oil contracted for near-term delivery and crude slated for delivery further in the future.
He also pointed out something else we agree with: "There will be no freeze of any consequence," Gartman said. "The contangos continue to widen, which tells you that there is an abundance of supply in the market. As long as the contangos continue to widen, as crude oil bids for storage, prices are going to head lower."
Another issue is shale output coming back online: "even if Russia and Saudi Arabia formally agreed to put a cap on crude production in the future, Gartman sees U.S. oil producers continuing to flood the market."
"It's only the utterly incompetent drillers who can't make money at these prices," said Gartman. "So, the amount of crude oil that's going to come out of the Bakken, out of the Permian, out of Eagle Ford, is just going to be very large." "The Saudis, the Iranians and the Russians have nothing they can say to us to tell us to stop our own production and we won't," he said.
Confirming this, last week the CEO of Pioneer Drilling Scott Sheffield admitted that oil wells in the biggest US oil fields remain profitable even with crude prices below $30/barrell as of right now.
The so-called break-even price for drilling in the Permian Basin in Texas is “sub-$30” a barrel, Sheffield said during a Bloomberg Television interview on Friday. For shale drillers such as Irving, Texas-based Pioneer, “break-even” typically means operating costs plus a 10 percent or 15 percent return.
As a result, Gartman believes that oil's supply concerns mean the commodity's price will be capped. "The reality is we're going to be stuck for several years between $35 on the low end, and $55 on the high," he said.
Going back to the topic of US shale, Gartman does touch on a valid point, namely that even if OPEC agrees on a production cut, it will have to be careful not to push prices too high so as to allow most of US shale to jump back in the pool: with many companies having already filed for bankruptcy and having a far leaner balance sheet, their all-in breakeven costs are substantially lower.
In fact, earlier today, the EIA said it had increasesd its 2017 U.S. crude output forecast to 8.51 million from previous month's est. of 8.31 million, based on “an assumption of higher drilling activity, rig efficiency, and well-level productivity than assumed in previous forecasts." Needless to say, any higher oil prices will only send US oil production, much of which is now hedged, higher.
OPEC appears to be realizing this. Overnight the WSJ wrote that OPEC delegates say they’re concerned that prices over $60 could result in a new surge of U.S. production.
Shale producers need prices above $60 to launch significant new production, Swiss oil consultant Olivier Jakob wrote in a note Tuesday. Within OPEC, “there is no interest to push crude oil prices” above that level, he wrote, since doing so could spark a new glut that could drive prices down all over again.
All of the above only covers the supply side of the price equation. Meanwhile, on the demand side we now find ourselves outside of peak driving season, but worse, demand from China is set to drop off substantially in the coming months due to the approaching capacity of China's SPR as well as the reduced demand from China's teapot refiners as reported yesterday.
As such, while we would not go so far as saying oil will not go above $55 for "years" - it likely will, as all that would take for that to happen is another massive short squeeze and HFT algo stop hunt, or simpler, a central bank announces it will start monetizing crude, something which sadly is all too possible in the current insane market - we tend to agree with Gartman's logic here. It just may be that Gartman's "forecasting" luck is finally changing.