REUTERS – Veteran oil trader Andy Hall said he is betting that a release of emergency oil stockpiles by consumer nations will not provide any lasting relief to high prices, with OPEC spare capacity reduced to a “wafer thin” margin by year-end.
Although his $5 billion Astenbeck Capital Management LLC fund trimmed its exposure to commodity markets in March after a run-up in prices earlier in the year, Hall remains confidently bullish and may add to his positions if prices fall much further, he said in a letter to investors this week.
Astenbeck is up nearly 13 percent through February this year, according to figures contained in the March letter, more than recovering from last year’s 4 percent decline, Hall’s first loss in more than a decade. The average energy hedge fund was up 7.5 percent through February, according to industry data tracked by eVestment Alliance.
The United States, Britain, France, and possibly, Japan, are considering releasing some of their strategic petroleum reserve (SPR) to try and tame high prices at the pump that have caused economic pain and protests around the world.
Hall, 61, whose decade-long profit streak at the helm of oil merchant-trader Phibro made him one of the biggest names in the market, said the “rhetoric surrounding Iran and its nuclear ambitions” and “Israel’s efforts to thwart them” will negate any impact to supply and prices from an SPR release.
“Globally, oil markets look set to continue to tighten through the balance of 2012,” Hall wrote on Monday to investors in the Westport, Connecticut-based fund. Reuters obtained a copy of the letter on Wednesday.
“A release of oil from the SPR will certainly have a negative short-term impact on prices but in the longer term, a secular shortfall in supply cannot be eliminated by ad hoc drawdowns from a finite stockpile,” Hall wrote.
“Prices can be manipulated, but not for long.”
Hall’s letter was written before the U.S. Energy Information Administration reported on Wednesday that U.S. crude production has been substantially higher than previously thought for at least the last 12 months.
“Should prices pull back significantly, we would expect to add to our current positions. Should prices continue higher without a significant correction, however, we are sufficiently involved to still benefit substantially,” Hall wrote.
He noted that the market was in backwardation, in which prices for later-dated futures contracts are at a discount to nearer-month contracts.
“The current structure in the oil market, namely backwardation, rewards the patient long.”
Since the year began, oil markets have risen more than they have fallen on fear that supplies will be squeezed by a growing embargo on Iranian crude exports.
London’s North Brent sea crude, which has determined global oil prices for some time, is up 15 percent on the year, hovering around $123 per barrel after hitting a 32-month high above $128 in March. U.S. crude is up about 3 percent, trading near $102.
Pump prices have run up a lot more. Benchmark U.S. gasoline futures are up a whopping 25 percent, with most of the gains notched last month. The economic and political fallout from such high prices has led traders to bet on an almost certain, if not immediate, release of crude from the SPR.
Many expect President Barack Obama to tap U.S. reserves for a second time in his presidency and no later than the end of April to prevent gasoline from reaching $5 a gallon and hurting his re-election bid. In the last U.S. SPR release in June, crude prices tumbled for a day before quickly climbing.
Hall said oil inventories in OECD countries — which mostly represent rich nations — are at their lowest levels since 2008 despite lackluster demand for energy from one of the mildest winters in North America and the economic downturn in Europe.
If global economic growth continues at around 3.5 percent this year, demand for oil will likely challenge supply in the second half of the year, he said.
“Seasonality of demand means that H2 demand will exceed Q2 demand by 2.7 million bpd,” Hall wrote in the letter. “By the end of the year, spare capacity within OPEC will be wafer thin (at best), leaving no cushion for any fresh supply disruptions.”
He said counting on Iran to buck to international pressure and give up its nuclear program may also not yield much.
“The chance of major concessions by the Iranians seem slight. The Iranian leadership is presumably acutely aware of the contrasting outcomes in Libya and North Korea regarding leadership change and the relinquishment of nuclear capability.”
(Reporting By Barani Krishnan; Editing by David Gregorio)