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EXCLUSIVE-Oil bull Hall sees redemptions, and long-dated U.S. oil falls

Barani Krishnan
Thursday, 6 Feb 2014 | 2:57 PM ET

NEW YORK, Feb 6 (Reuters) - Famed oil bull Andy Hall's hedge fund appeared to suffer notable investor redemptions in January after an 8 percent decline last year, according to a note to investors, a revelation that may add to the debate around a mystifying slump in long-term U.S. crude prices.

Assets under management (AUM) at Hall's Westport, Connecticut-based Astenbeck Capital Management fell to $3.5 billion at the end of January from $4 billion at the end of last year, according to data the fund shared with its investors earlier this week and seen by Reuters on Thursday.

The over 12 percent decline in Astenbeck's assets far exceeded its reported 2 percent loss for January, suggesting to other managers that investors were withdrawing capital from the fund, which once totaled nearly $5 billion. The fund declined 8 percent last year, according to the notice.

It is the latest setback for the 62-year-old Hall, whose fund has lost money in two of the past three years. After predicting the huge rise in prices a decade ago, Hall has struggled to profit as a surge in U.S. shale oil production upends predictions of a long-term decline in global supply.

Hedge funds typically do not divulge their investor holdings or market positions. An Astenbeck official declined to comment on its returns or activities.

It was not immediately clear whether the withdrawals were by investors or by Hall and other employees, who have money in the funds. It also was not clear whether other factors - such as the payment of annual management fees - may have accounted for part of the decline in AUMs.

But outside traders say the redemptions may have forced Hall to sell some long positions in so-called "long dated" U.S. oil futures, contracts for delivery in 2015 and beyond that suffered a dramatic slump early this year. Some contracts fell more than $3 to under $80 a barrel, their lowest in years and a record discount versus long-dated European Brent prices.

"Considering how the market for long-dated WTI performed in January and what a bull everyone had expected Andy to be in that market, it's indeed surprising if he lost only 2 percent," said the manager at another oil-focused hedge fund, who spoke on condition of anonymity.

The manager said that the fall in AUM and likely redemptions may have prompted Astenbeck to "dump some of their long-dated positions to raise money to meet those redemptions."

LONG-TERM BULL

In a separate letter to Astenbeck's investors, Hall made no mention of redemptions or liquidation, and it is not clear how many - if any - oil futures contracts Astenbeck sold. Traders said, however, that because such long-dated futures are typically very thinly traded even a small amount of selling could affect prices.

Oil traders and analysts who have struggled to explain the abrupt drop in long-term U.S. crude oil prices have offered a variety of other possible causes, from producer hedging to index investor selling to a big Brent options trade.

There is no sign that Hall has given up his bullish mantra that the U.S. shale oil boom will soon begin to peter out, that global demand growth will return and prompt another squeeze in supply that risks catching the world off guard.

For years, Hall has told investors about the benefits of betting on rising long-term prices, hoping to repeat his bullish bets a decade ago. Hall made billions of dollars for his Phibro trading house - then owned by Citigroup - by riding oil prices from $20 to nearly $150 a barrel just before the financial crisis.

Since then, oil has fallen off its lofty heights, with U.S. crude trading at just below $100 a barrel.

"Perhaps the most compelling reason for believing current forward prices are too low is that they are already at or below today's breakeven levels" for drilling, Hall wrote in his letter.

"Without constantly drilling new wells, producers cannot maintain production let alone grow it, given the high rates of decline of shale oil wells. Wells will only be drilled if it makes economic sense to do so."

Recent market activity suggest that the selling pressure in long-dated futures may have abated. This week, oil for delivery in 2016 and beyond has jumped by more than $2 a barrel, reversing nearly all the losses of early January. Typically more volatile prompt prices have been little changed, however.

MYSTIFYING FALL

The drop in long-term oil futures extended a broad decline that has pushed prices as much as $15 lower in two years as the rapid growth of U.S. shale oil production tempered expectations of ever-rising prices - a painful slide for bulls like Hall.

U.S. oil for Dec. 2019 delivery traded at more than $15 a barrel below Brent, a gap that doubled in just weeks. The widening spread may intensify calls by oil producers to ease a ban on crude oil exports, which they say is threatening to push future prices so low that they are forced to curb investment.

Hall said the logic of the export ban on U.S. crude was already being questioned by many politicians, and the economic incentive of selling the oil at significantly higher prices to overseas buyers will ultimately prove irresistible.

"A $15 spread between international and domestic crude oil prices provides a powerful incentive to do things to eliminate it," Hall's letter said.

(Editing by Jonathan Leff, Todd Benson and Grant McCool)