After a 2015 that famed oil bull Andrew Hall said “wasn’t much fun” because of plunging crude prices, the chief of Astenbeck Commodities says the market is ripe for a jump as producers operate near maximum capacity while supply risks rise.
Hall’s Astenbeck Commodities Fund suffered a more than 35 percent drop in 2015 as bullish bets on oil took a hit, pulling its total assets under management to $2.1 billion, according to company documents.
“Last year wasn’t much fun for anyone investing in commodities… An uncertain macro-economic climate and a strengthening dollar provided strong headwinds which, combined with moderately oversupplied markets, drove prices to multi-decade lows,” he said in a letter to investors this month.
Despite analyst forecasts for crude to fall as low as $10 a barrel, Hall said that conditions were in place for a rebound.
“Conditions for the oil industry have deteriorated dramatically in the past five months… The oil industry cannot function with $50 oil, let alone sub $40 oil,” he said.
Crude has fallen by 40 percent in the last five months to around $30, and its price is more than 70 percent below mid-2014 when the rout began.
“The simple fact is that the accepted oil narrative has become uniformly negative,” he said. “Prices will eventually have to move to a level that creates supply rather than destroys it…. We believe that price to be well above current levels.”
Energy consultancy Wood Mackenzie estimates projects worth $170 billion would be deferred or cancelled between 2016 and 2020, bringing the total since 2014 to $380 billion.
Big Risks, Little Spare Capacity
Hall said that one of the main drivers for a price jump could be that spare capacity had fallen to as little as 1 percent of global consumption just as there were rising risks of supply disruptions.
“Iraq, Nigeria, Venezuela or for that matter any of the oil exporting countries… are now wrestling with severely depressed oil revenues and the impact of this on restive populations,” he said, adding that escalating tensions between Saudi Arabia and Iran also added significant upside risk to the crude price.
Barring sudden disruptions, Hall said that the market would take longer to rebalance, largely because of a slowing global economy and ongoing high production.
He estimated oversupply in 2015 averaged about 800,000 barrels per day (bpd), below other analyst estimates which go as high as 2 million bpd.
For 2016, Hall expected production outside the Organization of the Petroleum Exporting Countries (OPEC) to fall by around 1 million bpd, led by a decline in U.S. output.
“Rising interest rates and widening credit spreads are making it much harder for indebted oil producers to fund their activities,” he said
Within OPEC, Hall expected “production will rise somewhat”, mainly from Iran, which has been allowed a full return to oil markets after sanctions were lifted.