Oil could go to $40 or lower: Oil trader Hall

Workers on oil rig
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In his most recent investor letter, oil trader Andrew Hall discusses why crude oil could spiral toward new low points of $40 or even less in the coming months amid a glut of supply and seasonally soft demand. But those prices won't persist, he writes, as capital-spending reductions at the major drillers help resuscitate the market.

"Prices at current levels (or lower) are not sustainable for very long," Hall, the chairman and chief executive of the Southport, Connecticut-based hedge fund Astenbeck Capital, wrote in the note to investors dated Feb. 2. "Oil companies are slashing capital expenditure to conserve cash and this will in due course moderate growth in the supply of oil and bring the market into balance."

Crude has been on a volatile streak in recent days, and fell nearly 9 percent Wednesday amid reports of a multi-decade high in U.S. oil supplies. Just the day before, oil had experienced a huge rally, leading some traders and analysts to think that the bear market was fizzling. And on Thursday, the domestic oil market rallied again, crossing the psychologically significant $50 mark. Brent crude, the global benchmark, closed at near $57.

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Oil traders and analysts have differed on where crude is likely to go this year, with some saying price could fall substantially further as the global markets face considerable oversupply in the first half of the year. The London-based Merchant Commodity Fund co-founder Doug King, for instance, told CNBC recently that oil prices could pierce the $30 floor and trade into the high $20s before recovering. Even so, exchange-traded funds that track the West Texas Intermediate and Brent crude markets have seen money pile in so far this year, suggesting that smaller investors are betting on a nascent recovery.

Oil-related stocks, like drillers and oilfield equipment companies, have suffered huge declines since last summer. But, like current market commodity prices, those stocks could be close to their nadir, Hall wrote in his investor letter. "Oil-related equities have been trying to find a bottom," he stated. "It's not clear whether they have found it yet, but we think it's probably close…. Well-positioned shale oil operators and other domestic producers could prove to be attractive investments."

Among the things that will benefit U.S. drillers, Hall noted solid management teams and cost efficiencies that are created by a down market. The Permian Basin in West Texas, Hall wrote, could be a particularly compelling place to invest, as the health of the wells there is strong and the size of the play itself is large.

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For now, though, storage capacity will be strained around the world as excess oil continues to be produced, Hall wrote. "It is a coin toss whether there is enough storage here or elsewhere in the world to hold all these barrels," says the letter. The combination of storage on land and floating oil tankers is about 400 million barrels, Hall stated, about the level that world oversupply is predicted to reach.

Although companies have slashed spending and taken numerous rigs offline in the U.S. in recent weeks, he stated, over time declining production overseas will require U.S. drillers to step supply back up. That, plus the need to harvest hard-to-get oil supplies from deep water and other treacherous environments, will put upward pressure on longer-term crude prices to $65 or much more, Hall wrote.

CLARIFICATION: This story has been updated to clarify Hall's wording.