Low Oil Volatility From US Shale Production Hurts Astenbeck

Low Oil Volatility From US Shale Production Hurts Astenbeck

As price volatility was sucked from oil markets due to steady U.S. production, Astenbeck Capital Management LLC found difficulty in 2013. 

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Astenbeck, with $3.5 billion under management, lost 8.3% in 2013 and carried that momentum into 2014 with a 2.1% haircut, according to an investor letter reviewed by ValueWalk.

While spot WTI crude prices were up 7.2% in 2013, fund manager Andrew J. Hall noted that “Oil for delivery 8 months forward was basically unchanged and everything beyond was down.”

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Despite the disparity between the untradable WTI price and futures, Hall looks forward to higher oil prices.  “We continue to think owning longer dated oil is a very attractive opportunity. Futures continue to trade at a large discount to recent spot prices: 20+ per cent in nominal terms and 30 per cent in real terms. The current degree of backwardation is pretty much unprecedented,” Hall noted.

Backwardation is typically a sign prices are headed lower, a fact that doesn’t deter the former Citigroup trader. “Oil futures are terrible predictors of where prices will be in the future. Take a look at the nearby chart (above). It compares the futures curve at the end of each year during the past decade with actual prices. You can see that futures rarely call the direction of the market and certainly not the absolute price level. The extreme backwardation we see now has more to do with a lack of buyers – commodities being out of favor with investors – confronting persistent selling by smaller producers hedging their future production.”

Oil: Second loss for Hall

The 8.3% loss in 2013 is the second yearly loss for Hall, who in 2008 famously generated a $100 million compensation package in 2009 that generated a firestorm after his then-employer, Citigroup, received a government bailout a year earlier.  Trading profits in a commodity fund are sometimes generated through price volatility, which hit 17 year lows in the oil market. Steady production from shale rock production in the U.S. is credited with keeping oil inventories – and thus price volatility – steady.

Strong underlying demand

Going forward, Hall cites strong demand underlying the economy for a potential move higher in oil. “Growth remains strong globally because of energy intensive economic growth throughout the developing economies,” the investor letter said. The report noted that, in its latest Energy Outlook, Exxon Mobil Corporation (NYSE:XOM) predicts that global energy demand will grow by 25 per cent by 2025 from the 2010 level. “If shale oil production is going to peak in a few years’ time and demand keeps growing it’s hard to see oil prices at that point being lower than they are today,” Hall concludes.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com
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