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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Bullish Bets On Oil Go Sour

Bullish Bets On Oil Go Sour

Prominent hedge fund manager Andy Hall got burned in July after oil prices crashed. Heading up Astenbeck Capital Management, Hall has made very large bets that oil prices would rebound, citing the unsustainably low oil prices and the rise of demand across the world, particularly in Asia.

But July was a brutal month for him. His hedge fund lost 17 percent of its value, or about $500 million.

Bloomberg profiled him and another notable trader, Pierre Andurand, who has taken the opposite position, arguing that oil prices will remain low for the next two years. And while Hall’s hedge fund saw millions go up in smoke, Andurand’s hedge fund, Andurand Capital Management, rose by 3.5 percent in July.

However, Hall maintains that a rebound is near. He’s right that global demand continues to rise. The International Energy Agency (IEA) predicted in its July oil market report that oil demand will hit 94.97 million barrels per day (mb/d) by the end of the year, a nearly 2 mb/d jump from the second quarter. Demand will increase in 2016 as well – the IEA says by another 1.2 mb/d. Related: Is Natural Gas As Clean As We Think?

Moreover, the supply picture should begin correcting, although data is wildly all over the map. Weaker shale drillers are starting to look pretty fragile under the weight of their mounting debt. Drillers raised $44 billion in fresh debt and equity between January and June of this year, a level of largesse that cannot continue. Debt is getting more expensive and restrictive. Hedging positions and insurance that have protected drillers through much of this year is expiring. And an increasing volume of debt is dropping into “distressed” territory and bond prices for weak drillers are crashing.

That could lead to more defaults and bankruptcies in the coming months. “Some of them are essentially running on fumes,” says Jimmy Vallee, a partner at the Houston law firm Paul Hastings.

A shakeout in the sector could trickle over into actual levels of oil production. So far, output has been steady and resilient, even though it has leveled off after years of growth. Related: Could WTI Trade At A Premium To Brent By Next Year?

Moreover, there is reason to believe that production data doesn’t add up. The EIA’s weekly data has production increasing all the way through June. And the latest weekly data shows production at 9.46 mb/d in the last week of July, having fallen just slightly from highs of around 9.6 mb/d earlier in the month.

However, EIA’s monthly data – which is more reliable – shows that production peaked in April at 9.69 mb/d, and fell 180,000 barrels per day in May to 9.5 mb/d. That would be consistent with the EIA’s monthly drilling productivity report, which expects another 91,000 barrel-per-day decline in August.

So what are we to make of this? Taken together, it appears that although production is still elevated, supply could have already been contracting a few months ago. Still, the markets have grown pessimistic in recent weeks after seeing EIA weekly data, which could be overstating the supply picture. Related: Global Oil Supply More Fragile Than You Think

On the flip side, some drillers are still somehow squeezing out more oil even though prices are low. Whiting Petroleum, the largest driller in North Dakota, saw its production hit 170,000 barrels per day in the second quarter of this year, an all-time high for the company. Continental Resources, which also focused on the Bakken, extracted 10 percent more oil and gas in the quarter.

Devon Energy, a company based in Oklahoma City, increased production by 30 percent in the second quarter. Pioneer Resources, a Texas-based exploration company, boosted production by 10 percent, and even promised to send rigs back to the field to drill more.

The confusing figures on the supply side are frustrating to the oil markets, which are seeking clarity about where exactly the sector is heading.

And to be sure, even though many companies are achieving production gains, many are not making money, as profits have all but been zeroed out by the collapse in oil prices.

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But that is cold comfort for hedge fund managers like Andy Hall, who are extraordinary bullish on the price of oil. Companies that continue to drill and somehow manage to increase production will merely ensure that oil prices will remain low for quite some time.

By Nick Cunningham of Oilprice.com

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