Energy Hedge Fund That Shorted Oil Sees Chance for $100 a Barrel
(Bloomberg) -- Even as oil prices are battered down to 18-year lows, one energy fund thinks $100 a barrel is achievable. But first, prices need to fall even further.
Westbeck Capital Management’s Energy Opportunity Fund climbed 20.2% in March after declines in the first two months of the year, according to an investor letter. That puts the commodities-focused fund up 3.7% in the first quarter after U.S. oil futures cratered 66% -- their worst quarter ever.
The fund, which gained 40% last year shorting U.S. shale companies, has turned its attention to oil tanks filling up at various points around the world, particularly at the biggest U.S. hub in Cushing, Oklahoma. With too much oil and not enough places to put it, Cushing may reach storage limits by mid-May, a market dislocation that could portend the next leg of a price rout.
“What’s happening now is extremely bullish for oil further out,” London-based Westbeck Chief Executive Officer Jean-Louis Le Mee said in an interview. “When we are on the other side of the pandemic, we think oil demand will normalize very quickly. And next year, we could even see unprecedented inventory draws and the world quickly running out of spare capacity.”
That rout will mean more U.S. shale producers will have to throttle back output, some of which could be permanent, he said. The shut-ins, coupled with a recent deal by OPEC and allied members to curb production, could set the stage for a price rebound in coming years.
Le Mee, who previously co-founded energy fund BlueGold Capital Management, said that West Texas Intermediate crude could trade around $16 to $17 in the next four to five weeks with storage filling up. Further out, inventories could start drawing down in the second half of the year provided that the spread of the coronavirus eases.
U.S. energy company shares rallied Friday on speculation parts of the country would soon begin to emerge from the coronavirus lockdown, which has crushed fuel demand. The S&P 500 Energy Index climbed 7.7%, with EOG Resources Inc. up 12%.
With U.S. production not returning completely given natural declines from shale and older wells, and unprecedented capital expenditure cuts for long-term projects, a return to normal could mean spare capacity -- the volume of production that can be brought on quickly -- could run out. If all that pans out, there will be a buying opportunity in oil equities.
“If you look back at the highs of 2014, a lot of the oil equities are down 90% to 95%. So, if we’re right in projecting much higher oil prices at the end of 2021 and 2022, there’s a huge opportunity there,” he said, adding that he favors certain names like Parex Resources Inc., MEG Energy Corp. and Whitecap Resources Inc.
While the fund has benefited from the move lower in oil prices, it’s had to delay plans to gear up the launch of its new Volta fund focused on batteries and renewables due to the spread of coronavirus.
Rise of Retail
Some of the volatility in recent weeks has been caused by the large amount of money that’s flowed into the oil exchange-traded products space, with a surge of interest from retail investors looking to find a bottom. Investors have added more than $1 billion over the past week to the United States Oil Fund. As of April 16, the USO accounted for more than one-quarter of the open interest in the June WTI contract.
“We’ve been surprised by the amount of money that’s gone into long ETFs lately,” Le Mee said. However, when Cushing hits tank tops and prices collapse, retail investors could suddenly start liquidating, accelerating any selloff, he said.
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