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Crude Oil Will Not Stay Above $40 Again, Says Analyst

Two years ago crude oil stayed consistently around $110 per barrel. Last year prices dropped significantly to $50 to $60 per barrel. Now crude oil is hovering around $30. According to seasoned investor and economist Dennis Gartman, this is not the bottom of the market. This is the new normal.

“In my lifetime, we will not see $40 crude oil again for longer than a week,” he says. “If oil does get above that threshold, it will be because of some geopolitical risk that occurred in a very short time.”

Why won’t the price remain higher for any sustained period of time? “There are thousands of oil wells that have been drilled in the U.S. during the last two years. If there’s a price spike, those will be brought on-stream instantly, driving prices back down,” explains Gartman.

How low will prices go? Gartman doubts that prices will hit single digits, but he does believe they will continue to trend lower. He considers this a win for both consumers and farmers. 

“Cheaper energy begets better production of everything, and cheaper petroleum begets cheaper fertilizers,” he says. “So cheaper energy is a godsend!”

How did oil prices get to $30 a barrel?
This was due, in part, to U.S. oil companies improving the process of locating, drilling, and fracking crude oil. The first key part of which was the advancement of seismic wave technology. 

Seismic technology provides a window underground to find reservoirs of oil, which has greatly increased energy reserves in the U.S. “There are at least four to six times more proven reserves of energy in the ground now than there were in 1968,” says Gartman. “And I guarantee that 20 years from now, there will be four times more energy reserves than there are right now. Why? Because we can find oil better.”

Not only can oil be located more accurately, it can also be drilled much more effectively. If you were drilling for oil 15 years ago, a 50% hit rate was about average. Now hit rates are closer to 95%. 

On top of that, oil companies have moved from fracking to manufrackturing, as Gartman calls it. “Every manufacturer gets better at the manufacturing process,” he explains. “Now we manufacture crude oil so much better than we did before that I call it manufrackturing. We can send water in, blast sand, and free up crude oil from places we never could before.”

These improvements in the production process have led to a much larger supply of oil. “The U.S. went from producing 4 million barrels a day 10 years ago to almost 10 million barrels today,” says Gartman. “If we can double the amount of crude oil we can produce here, what will happen when Russia starts fracking? Or China? Or France? Or Africa?” 

That large potential supply is what makes Gartman bearish about crude oil in the long-term. In the short-term, Saudi Arabia and Iran are doing their part to keep prices at all-time lows by refusing to curtail production.

“Saudi Arabia and Iran have embarked on a great war with one another,” says Gartman about the number two and number seven top-producing oil countries, respectively. “They are both attempting to drive the other country out of business.”

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