It appears that Andrew Hall, the (iin)famous oil trader, is finally giving up on his prediction that the price of oil will return to $100 a barrel in the near-term.
Hall, whose record profitability in oil trading has earned him the nickname ‘the Oil God’ has been claiming that oil will return to $100 a barrel since the price of the commodity began its decline during 2014. But in a letter to investors of Hall’s hedge fund, Astenbeck Capital at the beginning of September, the oil God appears to backtrack on this target, according to a copy of the letter obtained by ValueWalk.
Is Andrew Hall giving up on $100 oil?
Astenbeck’s regular letters to investors have become somewhat of an oil newsletter over the years for those who could get their hands on it. Within the letters Hall gives a detailed rundown of the happenings in the oil sector and developments since the last report. During the past two years these letters have also become a support system for oil bulls thanks to Hall’s optimistic outlook for oil markets.
More ValueWalk coverage on Andrew Hall and Astenbeck:
- Andrew Hall: Ignore The Bears, Oil IS Going Higher
- Andy Hall: Oil Prices Could Be Headed To $80 In Next 12 Months
- Andy Hall’s Astenbeck Capital 2015 Annual Letter – Oil Is Going Up
- Andy Hall Sticks To Long Oil Bet As Hedge Fund Tanks 35% [LETTER]
- Andy Hall Astenbeck Capital Q2 Letter: The Missing Barrels
However, it would appear that Hall is finally coming around to the idea that oil prices may not return to the levels seen three years ago–in the near-term at least.
In his September letter to investors Hall writes, “for now however, prices will be driven by sentiment and positioning. Until we see a decline in U.S. oil inventories, investor sentiment will be skeptical. This means for now we are likely to see prices in a $45 to $50 range (for Brent) before a sustained move higher…” which is about half the one hundred dollar earlier “price target”.
Specifically, Andrew Hall ends off the letter stating:
For now however, prices will be driven by sentiment and positioning. Until we see a decline in U.S. oil inventories, investor sentiment will be skeptical. This means for now we are likely to see prices in a $45 to $50 range (for Brent) before a sustained move higher later this year. That said, the structure of the market has been improving, with contango narrowing even as absolute prices move lower. This is further corroboration that the market is finally moving into deficit.
Nonetheless, even though Hall has lost his optimism for oil prices in the near-term he is still confident that towards the end of this year/beginning of 2017 oil prices will begin a sustained move higher as the market moves into deficit.
According to Hall, demand is increasing faster than expected:
“Most reporting agencies continue to adjust their forecasts of future demand higher – while at the same time revising higher their estimates of current and recent past demand. In its latest Oil Market Report, the IEA estimated Q1 2016 demand at 95.4 million bpd. That is some 0.9 million bpd higher than what they had been forecasting in February this year when the quarter in question was already half over!” Forecasts for demand in subsequent quarters have been adjusted higher too. It would not surprise us to see further increases in these demand forecasts over time if the past is any indicator of the future.
While supply is still falling:
The market imbalance of the past two years was created by too much supply (emanating primarily from North America) rather than a lack of demand. Supply was thus expected to bear the brunt of the rebalancing process that was meant to be triggered by the resulting price collapse. As it turned out, supply has been surprisingly resilient in the face of lower prices – and for various reasons.
Firstly, there was a certain momentum: projects that had been sanctioned in a $100 world were going to be completed regardless. That’s why production in areas like the Gulf of Mexico and the North Sea actually registered significant growth this year. It is also why Canadian oil sands production will continue to grow for the next year or two almost regardless of price (albeit with a hiccough this year due to the wildfires in the spring).
Secondly, Russia has continued to set production records because a collapsing ruble boosted the bottom lines of Russian oil producers whose costs are denominated in the local currency. Russia has a large domestic oil services industry, unlike most producing countries who are largely dependent on foreign oil service providers who set their prices in dollars or euros.
Thirdly, U.S. shale oil producers were able to slash their costs as oil prices fell by squeezing their hard- pressed service providers who had nowhere else to go and were prepared to run at a loss in order to stay in business. This allowed the U.S. operators to maintain at least a modicum of drilling and well completion activity – the more so as investors seem happy to supply more capital to the industry despite questionable economics. The E&P companies then focused their reduced activities on their most prolific producing
areas. Lower levels of drilling and completion concentrated in the sweet spots allowed them to minimize production losses from their high-decline rate wells despite a collapse in the overall rig count.
Finally, sanctions were lifted on Iran which allowed it to ramp up production and exports – something it achieved much more rapidly than virtually anyone expected. Iran’s return to the market has also complicated the calculus for the Saudis, who for political reasons seem loathe to cede customers to its Middle East adversary even if it would make economic sense to do so. Thus paradoxically, Saudi Arabia is straining to maintain exports in the face of stagnating production in a low price environment “
Global oil supply is finally beginning to contract. In Q2 last year, oil supply was 3.3 million bpd higher than a year earlier. In contrast, in Q2 of 2016, oil supply was 0.5 million bpd lower than a year earlier. The year-over-year decline in production is expected to be 0.7 million bpd in H2 2016. In Q2 last year, oil supply was 3.3 million bpd higher than a year earlier. In contrast, in Q2 of 2016, oil supply was 0.5 million bpd lower than a year earlier. The year-over-year decline in production is expected to be 0.7 million bpd in H2 2016.
Production has been hit in a disparate group of smaller, but nonetheless significant, oil producing countries and regions, like China, Colombia and Mexico (whose collective production will be down this year by at least 0.5 million bpd) as well as conventional (non-shale) production in the U.S. and Canada. Production growth has also ground to a halt in Brazil.
Even within OPEC, not all member countries have been able to participate in the production free-for-all.