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Skepticism About OPEC Compliance Drags Oil Down

Oil prices ended slightly lower…

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OPEC’s Production Cut: Who Will Cheat First?

Sentiment surrounding the OPEC deal…

How Did The Big Name Oil Bulls Fare This Year?

Pierre Andurand

For those active in commodity investments, it’s clear that forecasting prices is more or less a guessing game. This is especially true for oil and particularly this year, which has seen extremely heightened market volatility. At one point, markets were swung by any word uttered by Saudi Arabia’s Oil Minister and his Russian counterpart, making it extremely difficult to glean with any degree of certainty where prices would head.

Traders such as Dennis Gartman, Andy Hall, and Pierre Andurand have been among the names everyone quotes when it comes to price expectations. This year, those who remained bullish on oil and were patient enough turned out to be the big winners. For the others, well, maybe the New Year will be better.

Pierre Andurand was among the biggest winners this year, with his hedge fund--Andurand Capital--posting returns of 15 percent. Andurand bet on a price recovery by the end of the year and is still more bullish for 2017, expecting crude to reach US$70 early on. This might prove to be too optimistic, but the fact remains that Andurand Capital, as the FT notes, is one of very few large funds that survived the last two years in oil.

This wasn’t the fate of another fund, Blenheim Capital Management, run by investment vet Willem Kooyker. Blenheim doesn’t focus exclusively on energy commodities but it suffered its fair share of problems thanks to the oil price crash from 2014. The fund has been posting declining returns for four of the last five years, with assets under management eventually dropping by 85 percent to US$1.5 billion. The reason, according to Bloomberg, is that the fund’s boss just couldn’t predict the extent of the commodity crash.

Kooyker was not alone in this inability to estimate the worst that could happen. Dennis Gartman, a widely cited oil trader, went 180 degrees on his price forecast within two days around the OPEC agreement to cut production. As Zerohedge writes, a day before the historical November 30 meeting of the cartel in Vienna, Gartman went short on oil and a day after he admitted he was wrong, once the jump in oil prices was obvious. Related: Saudi Use Of Solar Could Boost Its Oil Exports

Going forward, however, Gartman is guardedly optimistic, forecasting that crude will remain around the US$55 mark for the next few years. Despite his missed call on oil at the time OPEC agreed the freeze, he argues that the freeze will not have any substantial effect on prices.

Another of the winners this year was Astenbeck Capital Management’s Andrew Hall. Hall bet on a price rebound in oil and got it. Back in August, he told investors that prices would start rising from then on and turned out to be right, winning from the fund’s holdings in four independent energy companies: Occidental Petroleum, Pioneer Natural Resources, EOG Resources, and CME Group. However, all in all, the fund has been swinging between losses of as much as 35 percent and gains of 30 percent. Despite this, Hall believes crude could reach US$80 a barrel in the next 12 months.

Undoubtedly, optimism bloomed after OPEC’s deal, despite doubts that not every member of the group will comply with their new production quotas. In fact, according to Bloomberg, optimism among traders is the highest since mid-2014, when the crisis began. Still, it’s worth noting that if the level of compliance drops below 100 percent among OPEC and non-OPEC producers, these oil bulls will feel a severe burn.

By Irina Slav for Oilprice.com

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Leave a comment
  • Craig Ferrell on December 26 2016 said:
    Ms. Slav - No one believes there will be 100% compliance, so your bar for expectations is off.

    Andurand is spot on. He believes there will be substantial compliance (including Russia), I agree.

    He also believes that many models are not accurately anticipating depletion/decline rates for the 10,000 or so global oil fields due to the lack of investment over the last 2 years.

    Couple those two supply factors to growing global demand and we'll see $70/75 WTI in '17

    My energy portfolios are up 140% YTD (mainly due to frac sand).

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