Astenbeck Capital Management founder Andy Hall is so highly regarded in the oil trading business that he earned the nickname "god." But Hall has admitted that the value of his analysis has diminished in an age of automated trading.
The rise of machine-based algorithmic trading is injecting so much volatility into oil markets, it's now difficult to produce returns by doing the type of fundamental analysis for which Hall is known, he told investors in a letter obtained by Bloomberg News. Hall confirmed in the letter he was shuttering his main hedge fund at Astenbeck after it reportedly tanked nearly 30 percent, Bloomberg reported.
"Algorithmic trading systems have increasingly come to dominate," Hall wrote. "Investing in oil under current market conditions using an approach based primarily on fundamentals has therefore become increasingly challenging. It seems quite likely this will continue to be the case for some time to come."
Hall is not alone. Many longtime oil traders have found themselves confounded by sharp price moves that run counter to fundamental signals like the balance of supply and demand, stockpile levels and disruptions in oil-producing regions, The Wall Street Journal recently reported.
Automated trading accounted for nearly 60 percent of volume in energy-related contracts from late 2014 to late 2016, the Commodity Futures Trading Commission reported in March. It accounted for nearly 50 percent in the prior two-year period.
Hall's talent for analysis allowed him to predict a tremendous bull market in crude, helping him to pocket $100 million in bonus pay at Citi in a single year.
The oil "god" had bet that prices would rise this year, but he has now turned bearish on the commodity, pointing to two of the prevailing factors in the long-awaited oil market rebalance: OPEC-led production cuts aimed at ending the glut and the surprisingly quick rebound in U.S. shale output as prices peak above $50 a barrel.
"The fact that OPEC has had to talk about further extending its production cuts is ultimately a sign of weakness, not of strength," Bloomberg quoted from Hall's letter.
"With the WTI forward curve back above $50, shale operators will be able to profitably hedge incremental production for 2018, thus risking even looser balances next year," he said.
The Bloomberg report said Astenbeck representatives did not respond immediately to requests for comment.