Prominent oil trader Andrew J. Hall, who runs $2 billion energy and commodities hedge fund Astenbeck Capital, has gotten burned on his bullish bet on oil prices.
Astenbeck Capital fell 4% in January, according to Reuters. Last year, the fund fell more than 36%, its biggest loss ever, the report said.
This year, oil has fallen to its lowest level in 12 years. On Tuesday, WTI hit $28.15 a barrel, down about 5%, and Brent hit $30.57, down about 7%. Meanwhile, the S&P GSCI Crude Oil Index has fallen more than 22% year-to-date.
“If 2015 ended badly, the start of 2016 was even worse,” Hall wrote in an investor letter dated February 1 seen by Business Insider.
Hall continued: “Global markets were wracked by pessimism over the outlook for economic growth. The epicentre of this anxiety was China. Concern that the Fed’s move to raise rates looked premature added to the worries. The price of oil continued to plunge along with those of other risk assets. This only added to the negativity: oil’s collapse was being read as the harbinger of some greater economic malaise.”
Hall, who’s been dubbed an oil trading “god” in the past, thinks that oil could rise to $60-80 per barrel.
So, while the market remains oversupplied in the short term and prices are likely to be volatile and subject to downdrafts, as 2016 progresses the current imbalance turns to a deficit. This will result in quite rapid reductions in inventories and should provide the catalyst for a sustained rise in prices from levels that are required to destroy supply to levels that are required to create it. For reasons discussed in previous letters we believe that level to be in the range of $60-80/bbl. We continue to believe that the longer prices remain at current depressed levels the greater the risk of a shortfall in supply down the road. It will be difficult for the industry to reverse quickly the decisions to cut investment in longer term projects. Stretched balance sheets will also need to be repaired before companies step up capital expenditures. Also, companies and their lenders will want to be assured of the durability of any price recovery before committing capital.
In the event that supply does not respond quickly to higher prices — a very real risk in our opinion — then prices would need to rise higher still — to levels that would destroy demand. So while the IEA talks of “the world drowning in a flood of crude oil” the extreme pessimism this sort of rhetoric engenders is ultimately self-defeating and risks setting the stage for the exact opposite outcome.
In December, Hall wrote that it’s not the time to exit the market, noting that prices could move lower in the short term. He’s been right on that part.
We’ve reached out to Astenbeck for comment.
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