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Zainab Calcuttawala

Zainab Calcuttawala

Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…

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Hedge Funds Bleed As Oil Price Recovery Fails To Materialize


Large hedge firms that had banked on an oil price recovery in the first half of 2017 are now reeling from the effects of a bearish market that shows no signs of a supply side recovery.

Three of the top five worst-performing hedge funds so far this year specialized in oil and energy trading, according to the financial firm HSBC.

The HSBC report shows that the AlphaGen Elnath fund, an equities fund geared towards oil securities, ended 2016 with 78 percent growth record. Halfway through 2017, the fund reported a 48 percent loss.

The Andurand Commodities fund also reversed almost of its 2016 gains as of last month. The Dorset Energy Fund, another big winner from last year, lost 42 percent in value after the price volatility in the first half of 2017.

“Losses in oil have been sizeable this year for specialists like Andurand," one hedge fund investor told World Oil. Data from the industry tracker Hedge Fund Research shows the average macro fund down just 0.8 percent in 2017, while average hedge funds see gains of 3.68 percent or higher.

The Organization of Petroleum Exporting Countries (OPEC) had earmarked 2017 to be a year of recovery for global oil markets. The supply glut would be at least partially alleviated via an international agreement to cut output by 1.8 million barrels per day.

But all hopes of a timely rebound in barrel prices have been derailed by a high-speed restoration of oil production in Libya and Nigeria – two OPEC nations that had been granted exemptions from output quotas due to years and months of civil strife, respectively.

U.S. shale oil exports, which skyrocketed in 2016 and early 2017, further flooded international markets, making it difficult for de facto OPEC leader Saudi Arabia to control the direction of oil prices. Related: The Biggest Obstacles For China’s $900 Billion Silk Road

Since the end of May 2017—when OPEC decided to extend the production cuts into March 2018—hedge funds and other money managers had added 200 million barrels of extra short positions until June 27.

“Funds have built a huge short position in the last few weeks, if these funds decided to cover their shorts, it could trigger the short-term increase in prices,” ATB Holdings said at the time.

Charles Sutton, the firm’s director of investment management, added: “The market players got carried over with the short selling, some of these positions will be cleared with the price increase.”

But the geopolitics of oil does not suggest that a significant rise in barrel prices is on the horizon. The overproducers will continue their toxic output patterns, while hedge funds struggle to measure the reliability of promises made by a plethora of nation states with competing oil revenue goals.

Energy hedge funds will not be able to guarantee high returns for their clients for a long time coming. Changes in market fundamentals require improvements in the supply and distribution economics of the international oil sector. Hedge funds play little to no role in making the politics of oil churn out decisions that are beneficial to the oil markets. They watch, listen and learn trade patterns to make well-informed investments, and that’s pretty much it.

For this reason, lower hedge fund returns represent a lagging factor in measuring a bearish market. They largely follow big shifts in oil prices, rather than indicate coming volatility. Hedge fund math does not hold a candle to the calculus of macroeconomic policymaking conducted on national and intranational levels.

By Zainab Calcuttawala for Oilprice.com

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  • RSK2020 on July 20 2017 said:
    It only tells the story of the specialist hedge funds. The big play in energies is to be long energy debt, long crude futures, short E&P Equities.

    This just content filler just because someone is willing to give a quote for an article, but so is almost all media, reporters don't get paid enough to really find out.

    Until this point the CL longs have made money even when prices went down from their Equity short position and debt positions.

    However this trade is now fried as demand has caught up. Now that inventories are shrinking @$2MMbd in US (CL+HO+RB+RFO+JetFuel) probably even higher worldwide.

    In 6 weeks US inventories will be down by 100 MMBL (Crude and products) currently its down by 40MMbl. Refiners mask crude inventories by using RFO (Residual fuel oil) as an input. RFO stocks are down at a all time low worldwide. Down 25% 10 MMbl in the last 5 weeks.

    This is the time to buy oil names hand over fist. No more oil hidden in storage or projects coming online other than US shale.

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