Hedge Funds Turn Against OPEC After Oil Gains Slip Away — “Basically, their mistake is to think they can fix prices—they cannot anymore.”

Traders tally up losses as cartel falls short in its effort to boost prices and reduce global glut

OPEC Secretary-General Mohammad Barkindo speaks with journalists in April in Abu Dhabi.

OPEC Secretary-General Mohammad Barkindo speaks with journalists in April in Abu Dhabi. PHOTO: NEZAR BALOUT/AGENCE FRANCE-PRESSE/GETTY IMAGES


May 17, 2017 5:30 a.m. ET

OPEC is trying harder than ever to woo big investors, but the cartel is finding that falling oil prices are making that a tough sell.

Dozens of hedge-fund managers and oil traders attended a series of closed-door meetings in recent months with OPEC leaders—the first of their kind, according to Ed Morse, Citigroup’s global head of commodities research, who helped organize some of the events.

Cartel officials made the case for how OPEC supply cuts would reduce the global glut and boost crude prices, according to people familiar with the meetings. Instead, oil prices are down more than 10% from their February high, and some prominent hedge-fund traders are reeling.

Investors placed a record number of bets on rising oil prices this year, but oil bulls havesince retreated.THE WALL STREET JOURNALSource: The Commodity Futures Trading Commission

Pierre Andurand, a French hedge-fund manager with a history of double-digit returns, met with a Saudi official from the Organization of the Petroleum Exporting Countries just before the Nov. 30 decision to cut production, said people familiar with the meeting. After a series of bullish bets, his main fund at Andurand Capital is down around 16% this year through May 5, according to a person who had seen the performance numbers.

Oil rose 2.1% on Monday after Russian and Saudi Arabian energy ministers said they would support another nine months of production cuts. That helped crude rebound from recent five-month lows and paved the way for an extension of the output cuts when the cartel meets on May 25.

But the rally fizzled on Tuesday when U.S. oil prices fell 0.4% to $48.66. Many traders see any extension as OPEC’s acknowledgment that the first round of cuts haven’t been effective. Some are starting to wonder whether OPEC’s ability to influence the market is waning.

OPEC officials couldn’t immediately be reached for comment.

Saudi Arabia’s energy minister Khalid al-Falih said Monday that while “there has been a marked reduction to the inventories, we’re not where we want to be.” Mr. Falih, speaking after a meeting of the G20 countries in China, said that a “general consensus” was emerging that extending the cuts “is the right approach and the right thing to do.”

“In my view, it’s the wrong response,” Doug King, chief investment officer at RCMA Asset Management and manager of that firm’s $200 million Merchant Commodity hedge fund, said of extending the current cuts. “We’re not seeing what we needed to see.”

Mr. Morse said he arranged introductions between OPEC Secretary-General Mohammad Barkindo and more than 100 hedge-fund managers and other oil buyers who met with Mr. Barkindo in Washington, D.C., New York and London since October.

Oil production from the U.S. has surged this year, blunting the impact of OPEC’sproduction cuts.THE WALL STREET JOURNALSource: U.S. Energy Information Administration

The coordinated outreach was a new effort by the cartel to build bridges between its members and Wall Street, aiming to convince investors that producers were serious about reining in supply, say people close to the matter. After asking what OPEC planned to do boost prices, fund managers came away impressed, Mr. Morse said, adding that some still text with the OPEC leader.

OPEC’s cuts started in January, and oil prices jumped 8.7% in December as traders anticipated an easing supply glut. Bullish bets by money managers hit a record for the 10 years of data from the Commodity Futures Trading Commission early this year.

Many analysts agreed with the upbeat mood, forecasting that crude prices would hit $60 a barrel or higher by the end of 2017.

U.S. oil inventories have declined since OPEC’s output cuts, but they remain near historic highs. That is in part because U.S. production has increased by more than 200,000 barrels a day during the past two months. If output continues to ramp up at that pace, U.S. producers could end the year producing 800,000 barrels-a-day more than at the end of last year. That would replace much of what OPEC has taken off the market, analysts say.

In recent weeks, hedge funds have cut their bullish position on oil prices to the lowest level since November as a gasoline glut raised worries that demand could falter.

Andrew Hall of Astenbeck Capital bet heavily that OPEC’s strategy would work.

Andrew Hall of Astenbeck Capital bet heavily that OPEC’s strategy would work. PHOTO:AMANDA GORDON/BLOOMBERG NEWS

Mr. Andurand informed investors in an April 24 letter reviewed by The Wall Street Journal that oil prices “will reach new highs.” But three weeks later, he had abandoned most of his bullish bets, said a person familiar with the matter.

Veteran oil trader Andrew Hall also bet heavily that OPEC’s strategy would work. A fund managed by his Astenbeck Capital Management LLC, a Southport, Conn., hedge-fund firm, lost 17.3% this year through April, said a person familiar with the matter.

Mr. Hall is one of a few still preaching patience. He recently wrote to investors predicting that inventory excesses would be eliminated, said the person familiar with the matter.

Astenbeck and Mr. Hall didn’t respond to a request for comment. It isn’t clear if he or anyone at his fund attended meetings with OPEC.

Oil reclaimed some momentum last week after the U.S. Energy Information Administration reported the biggest stockpile decline of the year and prices rose more than 3%.

U.S. crude stockpiles have started to drop, but remain near historic highsTHE WALL STREET JOURNALSource: U.S. Energy Information Administration
.million barrelsWeekly U.S. ending stocksJan. ’16MarchMayJulySept.Nov.Jan. ’17MarchMay440450460470480490500510520530540May 6, 2016×508.5 million barrels

“It’s one thing to talk about cuts. It’s another thing to see them,” said Gary Ross, head of global oil at PIRA Energy, a forecasting and analytics unit of S&P Global Platts. He dismissed bearish traders doubting OPEC’s influence. “Their idea is that OPEC is irrelevant, and that doesn’t make sense,” he said.

But funds betting against OPEC have done well. Switzerland-based GZC Investment Management, which oversees just under $200 million, is up nearly 10% this year, in part due to a bet on falling oil prices.

“Basically, their mistake is to think they can fix prices—they cannot anymore,” Vincent Elbhar, GZC’s managing partner said of OPEC.

Write to Alison Sider at alison.sider@wsj.com, Timothy Puko at tim.puko@wsj.com and Laurence Fletcher at laurence.fletcher@wsj.com



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One Response to “Hedge Funds Turn Against OPEC After Oil Gains Slip Away — “Basically, their mistake is to think they can fix prices—they cannot anymore.””

  1. daveyone1 Says:

    Reblogged this on World Peace Forum.

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