A new report from Goldman Sachs says that Saudi Arabia is going all in to force a cutback in U.S. shale production. According to GS analysts Damien Courvalin, Jeffrey Currie and Anamaria Pieschacon, OPEC gave a strong message at last week’s Vienna meeting that it would tolerate low crude prices to maintain market share, meaning “prices could trade lower until evidence of a pull-back from US E&Ps, when they announce their 2015 capex guidance in January-February.” The not so subtle message from OPEC to the U.S. is to stop pumping out shale gas and oil or there will be a sustained slump in prices past next January.

But regardless of whether oil slumps down another $10-15 or bounces back here over the next couple of months, the more than 30% drop in the price of oil over the last few months has dinged a few portfolios and minted a few new millionaires.

oil crash losers Oil Bears

Oil bears who made big bets on lower crude prices

It turns out that none of the biggest commodity funds saw the big move down in oil coming. “A lot of people who trade crude have a bullish bias,” noted Ernest Scalamandre, managing member of AC Investment Management, which invests in several hedge funds, also saying no large macro fund “really caught the big short move.”

A number of smaller funds did have significant short positions established before September, and have enjoyed very strong returns over the last couple of months. Taylor Woods Capital Management LLC, a $932 hedge fund backed by Blackstone Group LP, has been one of the oil bears since December 2013. Taylor Woods’ fund moved up more than 8% in October, recovering from a loss for the year to up about 5% currently, according to knowledgeable sources.

Another winner was Andurand Capital Management LLP, run by former Goldman Sachs oil trader Pierre Andurand, which was 6% in October due largely to shorts against both Nymex and Brent crude futures.  Andurand didn’t short oil until early October when he became convinced Saudi Arabia was not going to cut its production significantly. Andurand’s $300 million fund is in the black by over 5% for the year as of November 24th.

Oil bulls suffering significant losses

Some hedge funds saw the move in oil coming. Balyasny Asset Management, the prominent multi strategy hedge fund, noted in a recent call to investors, a copy of which was reviewed by ValueWalk, that  there could be a low priced oil strategy in place designed to derail U.S. shale oil production. After the recent OPEC meeting, many experts opined that Saudi Arabia is attempting to ‘kill’ the shale industry by keeping oil prices low.

Legendary oil trader Andrew John Hall, who manages his own Astenbeck Capital Management LLC, and serves as CEO of Phibro, a trading unit Occidental Petroleum bought from Citi in 2009, has definitely been caught on the wrong side of the recent slump in crude oil prices. Hall is sticking to his guns, however, and has been telling subscribers to his investment letters that he is buying long-dated crude contracts in anticipation of a run-up in prices as the U.S. shale boom fizzles.

Hall noted earlier this year:

 

That said, back in August, Astenbeck reduced its exposure to crude and moved a bigger share of its portfolio to cash.

Finally, Andy Hall’s old firm, Duet Commodities forsaw the volatility in oil prices. In a letter to investors from mid-November, the hedge fund stated:

We are entering a period of high volatility in the Oil market, where financial flows can create conditions for strange behaviour
in both relative values and the shapes of forward curves.

We think the best risk/reward position today is to be long volatility and downside convexity in crude. Indeed, we observe  changes in the behaviour of many market participants, with fewer people hedging via net selling of options. Furthermore, we see a strong possibility for a number of producers to hedge aggressively if the market moves lower, consequently increasing downside pressure and increasing volatility across the curve.