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April 11, 2016

Will Oil Double By Year-End?

Saijel Kishan and Grant Smith of Bloomberg report, 'Multi-year bull run' begins for oil, says Pierre Andurand:
Pierre Andurand, a hedge-fund manager who predicted the oil collapse, said crude is starting a "multi-year bull run" because low prices have curbed supply.

Crude futures, currently trading near $US40 a barrel, will rebound to $US60 to $US70 this year and $US80 in 2017, the chief investment officer of London-based hedge fund Andurand Capital Management LLP said in a newsletter to investors. A spokesman for the money manager declined to comment.

"Large spending cuts are taking a toll on operational maintenance," according to the newsletter, which was dated February. "After having been in an oversupplied market we expect inventory draws to start in a few months and accelerate quickly."

Oil has slumped about 60 per cent since mid-2014, prompting companies to lay off workers, cut investment and cancel projects. While prices have rebounded from a 12-year low reached earlier this year on speculation the surplus is easing as US output declines, stockpiles in the world's largest oil-consuming nation continue to grow.

The $US710 million Andurand Commodities Fund gained 3.5 per cent in the first two months of the year, while Brent crude futures, the global oil benchmark, lost that amount in the period. The S&P GSCI Crude Oil Total Return Index declined 18 per cent. The Andurand fund added 4.1 per cent in 2015 and 38 per cent in 2014, according to the investor letter.

OPEC leader Saudi Arabia has already achieved its objective of curbing supply growth from rivals, and its diplomatic efforts with fellow producers may be aimed at averting a price surge in coming years as production falls short of demand, according to the newsletter. Most members of the Organisation of Petroleum Exporting Countries will meet with Russia on April 17 in Doha to complete an accord to cap oil production, an initiative that has helped revive prices.

"It is possible that the Saudis are now less worried about short-term downside risk than medium-term large upside risk," Andurand wrote. The kingdom, which "does not want crude oil prices to spike", has realised that the slump in later-dated futures prices "has created a significant supply gap in the years to come".
Bryan Rich of Forbes also reports, Top Oil Trader Thinks Oil Will Double From Here:
If you’ve read our daily notes for the past few months, you’ll know how important oil is for global markets at this stage. Even after a 50% bounce, if you were told what oil did on the day, you would probably have a good idea what stocks, interest rates, currencies and other commodities did as well.

With that in mind, two of the best oil traders in the world that have been calling for oil prices to rise back to $70. Both Andy Hall and Boone Pickens continued to make their case, even as oil broke below $40 and then $30.

They have more company. Pierre Andurand, a former Goldman Sachs oil trader and manager of the hedge funds Andurand Capital and BlueGold Capital, has not only called a bottom in oil, but believes oil will trade back to $80 a barrel, more than 100% higher than current levels.

Andurand has made a killing trading oil in his hedge funds, returning 36% annualized net of fees since 2008. And he has a very high batting average on calling tops and bottoms.

He started his hedge fund BlueGold Capital in 2007. He made 210% in 2008 shorting oil at its all time high, then in 2009 he went long oil and put up 55% for the year.

He shorted oil again in 2014 near the top, when oil prices collapsed from over $100 to below $50 — he made almost 50% that year. In 2015 Andurand stayed short oil and was right again. He made 5% net of fees, in an extremely tough trading year.

In 2016 Andurand said oil would bottom in late January of this year and again Andruand was close to being spot on. Two weeks later oil bottomed at $26 and shot up to $42 in a month.

So now he’s predicting a double by next year for oil prices. He says oil has bottomed because there is very little spare capacity in the system” and says low prices have curbed supply. He expects inventory draws to start in a few months and “accelerate quickly.” He thinks $70 this year, and $80 next year.
When Pierre Andurand discusses oil, I listen. He's one of the last commodity hedge-fund traders left standing and he has shared his views on my blog in the past, providing his outlook on oil back in December 2014. Back then, Pierre shared this with me:
"I think much lower oil prices will plant the seeds for the next big bull run, but I think it will be for 2017-2018. Eventually by 2018-2019 I think prices could make new all-time high. That is why I am optimistic about trading opportunities in oil markets, as there will be more volatility and larger moves than in the past thanks to OPEC letting prices balance the market."
There are other respected oil analysts who are also calling for a big jump in oil prices this year. Mike Rothman at Cornerstone Analytics – a macro energy research firm that has produces some of the most accurate data out there – is calling for oil to hit $85 by Christmas.

Big swings in oil prices have major implications for many countries like Canada, Russia, Norway, Venezuela and Saudi Arabia. Rising oil prices bolster their currencies and increase global inflation expectations, throwing a serious kink in my outlook for more deflation ahead.

A big jump in oil also bolsters the fortunes of hedge funds that bet big on a global recovery as you will energy (XLE), oil exploration (XOP), metal and mining (XME) and emerging markets (EEM) shares continue surging higher even after making explosive move from their bottoms in late January.

It's very simple: if you believe oil is heading to $85 by the end of the year and then it's going to make new all-time highs by 2017-2018, you better be long commodity currencies like the Aussie and loonie and even emerging market currencies like the Brazilian real. You should also be long energy and commodity stocks too.

What else? If oil is headed back to new highs then Jamie Dimon is right, the bond market is in for a nasty surprise this year as the Fed will raise rates faster than the market anticipates.  

I remain highly skeptical on oil and commodities for many reasons. With many nations mired in deflation and the global recovery in danger of stalling, it's hard to see significant changes in the demand for oil over the near term but I will admit that supply shocks could figure in prominently, especially if global growth surprises to the upside in the months ahead.

Still, it's a crapshoot. In my next comment I will discuss currencies and carry trades dominating the global landscape. It's very important to understand the macro crosscurrents because there are a lot of moving parts to what is going on and as I keep warning, if you get your macro calls wrong, you're toast in this environment.

Below, price of U.S. crude, which bottomed on Feb. 11, should hit $85 per barrel by the end of 2016, oil analyst Mike Rothman said Monday. 

And CNBC's Bob Pisani discusses why the markets may be decoupling from oil. The broader trends of a weaker U.S. dollar, supply constraints and OPEC have impacted oil prices lately but will this be enough to see oil prices double by year-end?

That remains to be seen but while a decline in the U.S. dollar supports commodity prices, it presents huge challenges to the global economy. That's a topic I will cover in my next comment. 

Courtesy Leo Kolivakis, founder of Pension Pulse (Archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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